After the first part of my presentation, Tim will give you the detail behind our 2011 financial performance and
After that, for the question-and-answer session, I'll be joined by a number of our senior executives;
This team brings together many years of experience and we are fully committed to executing on the strategic initiatives we set out in June last year.
Today, I would like to present some key points to start with; then 2011 in context for Lloyds; then discuss the progress we have made against our strategy; provide you with an overview of our financial performance, where Tim will provide more details later on. Mark will then cover costs and Simplification and I will do the close with some remarks on the economic and regulatory environment and our guidance for the year ahead.
Let me take you through the key points.
We have achieved a significant reduction in balance sheet and delivered a resilient performance, given the challenging economic environment. And we have made good progress against our strategic initiatives; achieved strong market shares in our core segments; and strengthened our franchise through investment behind the brands, distribution, customer relationships and our people.
We are building a bank which has the balance sheet strength, efficiency and customer franchise to continue to deliver a resilient performance in challenging market conditions.
Before I go into detail on our performance during 2011, I think it is important to set the context around what has been a very challenging year.
From an economic perspective, you will recall that, at the time we announced the outcome of our strategic review and our first-half results in 2011, I emphasized the contingent risks from the sovereign debt crisis and the impact of a double dip.
The risk has partly materialized and impacted on the propensity of consumers to spend and invest, interest rates remaining low for longer, continued high levels of impairment and ongoing challenge in the wholesale funding markets and related costs for the industry.
As we set out on our journey to become the best bank for customers, 2011 was focused on establishing the right foundations from which to rebuild the business.
We have had to tackle many internal challenges, such as reshaping the organizational design to make us more agile and bring us closer to the customer; developing a new culture on simpler values and increased urgency to tackle problems; and enhancing operational controls to manage the business more effectively.
And in terms of meeting customers' expectations, we took the responsible position in tackling PPI, which has required the significant mobilization to process claims and has come at a significant cost. This was the right thing to do. It provided clarity for customers and shareholders, whilst also going some way to rebuild our customers' trust.
The ICB outcome was uncertain for large parts of the year and, like many of our peers, we are being scrutinized much more by our regulators.
We are at the beginning of this journey and, although 2011 showed good progress in building the right foundations to take us forward, we remain aware of the many challenges we continue to face. The turnaround at Lloyds will take three to five years to complete.
Turning now to the progress we have made this year.
To deliver on strategy to be the best bank for customers, we are focusing on four key pillars; strengthening our balance sheet, reshaping the business, simplifying the Group and investing to grow our core business.
We have made strong progress on each of these areas and I will now provide you more detail on what we have achieved and why it has been so important to do this in the context of my earlier remarks.
During 2011, we prioritized strengthening our balance sheet by focusing on four key areas, in order to reduce our exposure to wholesale funding markets and improve the quality of our assets.
First, the total balance sheet for the Group reduced 2% year on year, but the decline in our banking funded assets was 10%, primarily driven by non-core assets, which we managed down by 27%. It is important to note that, from a funding perspective, our Banking funded assets are now less than
Second, we delivered above-market growth of 6% in customer deposits, and this now provides 62% of the Group's total funding requirements.
Third, we improved the overall credit quality of our portfolio, with a 13% reduction in RWAs when compared to the decline in funded assets.
These measures led to a reduction in our wholesale and government funding of 16% and an improvement in its maturity profile.
Finally, we also increased the amount of liquid assets we hold, providing an additional buffer to our funding position and increasing our resilience to market shocks.
This has resulted in a significant strengthening of the balance sheet in 2011. And what's clearly demonstrated is the substantial decrease in our Group loan-to-deposit ratio; down 19 percentage points, and now only 5% above our medium-term target of 130%. And in our core business, we are now well below our target of 120%.
Given the decrease we have achieved in RWAs, which, in relation to our non-core assets, has been achieved without significant hits to capital, we have been able to increase our core Tier 1 ratio by 60 basis points to 10.8%, despite the PPI charge, equivalent to approximately 60 basis points of core Tier 1 capital as well.
So, in summary, we have a smaller balance sheet, underpinned by a stronger capital base, with less reliance on wholesale funding markets and greater liquidity buffers.
Now, I would like to focus on the core business, where we saw good underlying profit growth across all divisions, apart from Wholesale, where the impact of customer deleveraging and challenging conditions more than offset the successful enhancement of product capability.
At the same time, we have significantly reduced risk by a number of management actions, including an accelerated reduction of non-core assets by
A particular area of focus for the management team has been our Retail deposit growth, where, despite the market slowing, we have maintained our momentum. This has been particularly noticeable in the successful re-launch of
Our ISA promise in the first half of the year, and our savings prize draw in the second half, result in deposits growing 8% year on year; three times the market growth. This is strong evidence of the success of our multi-brand strategy. It provides flexibility to use our different channels to attract deposits and grow share, whatever opportunities exist.
In this slide I want to emphasize we have found ways to reward our customers through product innovation, rather than our success being led through aggressive pricing strategies. We were not leaders in price, yet our growth was more than double that of the market.
Supporting our customers in the
We outperformed the market, growing net loans and advances to customers of our core commercial business by 3%, versus the market decline of 6%, according to Bank of
In 2012, we will extend this support further, to help stimulate growth and improve confidence, through making at least
And that brings me neatly to the third pillar of our strategy, Simplification. Simplifying the Group is a key part of our strategy. We have an enviable foundation of knowledge and expertise based on the success of our integration program, which is now delivering annual run-rate savings of over
We've made a strong start, and achieved run-rate cost savings of over
Given the progress we have made, we are today announcing that we will increase our 2014 in-year cost-saving target by a further
While we are reducing costs, we are committed to improving the quality of our service for our customers. And I am very pleased that we have outperformed against the stretching targets we set ourselves. As you can see, we have achieved substantial reductions in reportable FSA complaints. This puts us ahead of our major banking competitors.
In 2012, we aim to improve further, by reducing complaints to only 1.3 per 1,000 current accounts. And by 2014, we aim to reduce this to one per 1,000 accounts.
But it's not just about complaints. Less time spent on complaints means greater time for our colleagues to devote to broadening our relationships, enhancing the customer experience and increasing the share of wallet of our customers.
Now I will turn to the investments we are making in our core business and highlight a few examples of progress with the growth initiatives I announced at our strategic review.
Turning now to SMEs. Here our targeted (inaudible) propositions and advice model are having a positive effect, as I described earlier on. Importantly, as this is a key part of our strategy, Commercial has been active in supporting the wider Group results, with good growth in cross selling of Insurance, Wealth and Financial Markets products.
In Bancassurance, our wider distribution initiatives are beginning to gain momentum as we prepare our business model for RDR. In Retail, our Bancassurance initiative was a key driver behind the 6% growth in other operating income and our value-over-volume strategy resulted in a 23% increase in new play, new business profits.
With regard to Wholesale, we have been refocusing the business and working on improving the range of products for our existing Corporate customers. For example, in debt capital markets our sterling market share has increased from 8% to 9% as we develop this capital-light franchise, supporting
And finally on Wealth, we see good opportunities. We are making enhanced use of the Group's insight program to identify customers most likely to benefit from Wealth services. This has resulted in 80% of our customers within our newly developed Wealth proposition coming from our existing Group customer base.
We have initiated IT development to provide an enhanced service for our execution-only customers and are building simpler processes for customers to move from other parts of our Group into Wealth.
Turning now to our financial performance. Our combined business profit was broadly in line with expectations, with a profit before tax of
Underlying income in our core business was down 5%, reflecting subdued customer demands and lower interest rates. This was partly offset by a reduction in our core costs, where operating expenses fell, and we also benefited from a fall in impairment. As a result, core underlying profit, before tax and fair value unwinds, fell by 2% but return on risk weighted assets increased to 2.5%.
Turning to the core business performance. Thanks to the improvement in our funding mix, margin performance was resilient, declining by only 6 basis points. This was despite lower interest rates and the refinancing of a significant amount of
The decline in non-core income and margin reflected the asset reductions we achieved in the year, higher funding costs on what is the predominately Wholesale funded business and the higher proportion of impaired assets.
As a consequence of some of the risk mitigation actions I talked about earlier, we saw declines in both core and non-core AQRs. Core performance continued to trend closer to our target of 50 basis points to 60 basis points for the Group as a whole.
Now looking at the margin drivers in the core business in more detail. This slide first shows the progression of Group asset and liability margins in the year.
The point I want to make here is that you can see that by improving our pricing and mix on the asset side we have been able to broadly offset the negative impact of more costly deposits. The real funding cost for Lloyds is, therefore, being driven by wholesale funding markets.
And when you look at our core business, although we have been able to fully offset the decline in deposit spread and mix through re-pricing of our assets, we still have some wholesale funding cost impact. But in the core business, where we are focusing for the future, we have been able to fully offset the impact of liability costs and mix with the re-pricing and mix of our assets.
Turning now to impairments. Improving asset quality resulted in a continued decline in impairments in both core and non-core across all divisions. This reflected our prudent provisioning and the conservative approach to risk, which we have fully embedded across the business. This is driving tangible benefits to the overall quality of loans being added to our book.
Looking now at the performance of each division's underlying core business in more detail, starting with Retail.
Retail made good progress in executing against this strategy. Despite subdued markets, Retail delivered a 9% increase in underlying core business profit, before tax and fair value unwinds, and the return on risk weighted assets increased by 40 basis points to 2.8%.
As a result of our investment in multi-channel we saw a 9% increase in active online customers and successfully launched mobile applications from
The core Wholesale business saw in a fall in profitability, largely driven by a decline in income as a result of a reduced balanced sheet, as customers deleverage, and challenging market conditions. We did see growth in some of the capital-light businesses we are developing, such as our rates and foreign exchange businesses.
Continued success in our growth initiatives such as these will lead to an increase in revenue per customer, a key KPI for this business. The rise in impairment was caused by the impact of a few specific large cases, reflecting the lengthy nature of Wholesale impairments.
Looking now at Commercial. Commercial delivered a strong operational financial performance, despite the challenging environment, thanks to its robust relationship model. Core profit, before tax and fair value unwinds, more than doubled, due to higher income combined with reduction in both impairments and costs. As a result, return on risk weighted assets grew by 110 basis points to 1.8%.
Turning now to Insurance. Here profit, before tax and fair value unwinds, increased by 11%, driven by a reduction in operating expenses and insurance claims. Insurance remains a consistent contributor to the Group's overall performance and the success of our value-over-volume strategy has delivered a 50 basis points increase in EEV new business margin and increased life, pensions and investments,
In Wealth and International core total income increased by 6% and net interest margin by 85 basis points. This mainly reflected improved margins and strong volume growth in deposits. We saw strong progress in other parts of the franchise, with an 8% growth in affluent customers and 22% growth in customer balances, for example.
This concludes the first part of my presentation. I would now like to pass over to Tim.
Despite the challenging external environment, we delivered a combined businesses performance broadly in line with our expectations. On this basis, and excluding all of the volatile items, good or bad, underlying income declined by about 10%. This reduction reflects a smaller balance sheet, principally driven by the substantial run off of non-core assets, the subdued demand in our core business and the expected reduction in our net interest margin.
Costs reduced by 4%, mainly as a result of further integration synergies, as well as the initial cost savings delivered by the Simplification program; more from Mark on that later. The impairment charge reduced by 26%, with reductions of over 20% from each division.
As a result of these factors we delivered a 21% increase in profit before tax and the picture isn't very different if we strip out all of the volatile items, liability management gains and asset sales, which I will set out on the next slide. Stripping those out, Group profits are up by 22%.
The core business also performed well, with strong margin performance and lower impairments delivering a 3% profit growth. I'll look at core results again in a moment.
But that's profit on a combined businesses basis, but, as I said, this measure of performance is somewhat obscured by the volatility effects. Filtering out this noise down the page, and filtering out this noise created by volatile items as well as liability management and asset sales, we get a clearer view of the underlying performance and see that underlying, or clean profit, for the year increased by that 22%.
If we now take the profit numbers on a combined business basis from the top of this slide, then we need to include the other statutory items to get to the bottom line result.
As expected, the biggest effect came from the PPI provision, which we reported in the first quarter. In addition this year, we have seen negative volatility from the Insurance businesses, in contrast to a positive impact last year. The statutory result also includes charges for both integration and Simplification delivery costs, as well as the costs of Project Verde.
If we now move from performance at the Group level to performance in the core business for a moment, well, as I said, I'm pleased to report that our core business delivered a really good performance, considering the challenging economic environment. We saw subdued demand for new lending and continued customer deleveraging in the core business, and average interest earning assets are down 5%. And, of course, that contributed to the 2% decline in core income.
Now, you've heard me talk before of higher wholesale funding costs in our business. But this is much less of an issue in the core book, which benefited from an improved funding mix, as a result of increased customer deposits. So our core net interest margin was down just 2%, or 6 basis points, to 2.42%.
Even with lower operating expenses, and given the small reduction in income, the 3% increase in profit before tax was mainly driven by a substantial reduction in the core impairment charge. But this also includes the liability management gains and those volatile items.
So, to be fair, if we strip out the one-off and volatile items, core business profit, before tax and fair value unwind, decreased by just 2%. And this principally reflects the lower income arising from higher funding costs, and the smaller balance sheet.
These same trends are prevalent if we look at Group income, where the reduction is mainly as a result of the smaller balance sheet with shrinkage, of course, in both core and non-core assets in 2011.
Even though we have exceeded our Merlin lending targets, we continue to see subdued lending demand, as well as customer deleveraging, continuing. At the same time, as we've said, we continue to reduce non-core assets in order to strengthen and de-risk the balance sheet.
This shrinkage, obviously, had a negative effect on income. However, it also creates a benefit from the reduced volume of costly, wholesale funding required.
In addition to this volume effect, we've also seen a funding cost effect, with the biggest movement coming from the increase in the wholesale funding cost. Now, this has had a large effect on our Group margin, as Antonio showed, but this was partly offset by the funding mix benefit we realized from increasing customer deposits.
Doing the same analysis, just for the core business, well, we have a similar pattern, although here I've drawn out separately the benefits of the deliberate and continued asset margin widening activities, which have fully offset the pressures on liability margins.
So the core income story can be simplified to a simple perspective of subdued demand and higher wholesale funding cost. So it's just as well that we're bringing down wholesale funding as fast we can, through our deliberate and focused risk management programs.
I always give you a helicopter view of the margin drivers. Well, here it is. The net interest margin in our Banking business was 2.07%, as we have seen. The decline from 2010 is in line with our guidance, but we have yet to see the full annualized impact of refinancing ourselves away from
In addition, on-balance sheet liquid assets are up 44% to
On the upside, however, we continue to re-price assets wherever appropriate, and we have seen the margin benefit from a stronger deposit funding mix in the core business.
Turning briefly now to costs. Well, total costs are down 4%, but actually the costs that we can directly control are down 6%. And this is great delivery of integration savings and the first deliveries of cost savings from the Simplification program. The bank levy, shown here, was accrued in the final quarter and was lower than initially expected due, of course, to the improvements in our funding profile.
I'd now like to spend some time on impairments. Well, I'm very pleased with the continued reductions in the impairment charge in 2011, which is 26% lower. And we have seen lower charges across all divisions. Especially pleasing is that we have delivered another strong year of non-core asset reduction, and we have achieved that without taking additional impairments out with our guidance.
So let's have a closer look at divisional performance, using the usual charts. We saw a 29% reduction in the Wholesale impairment charge in 2011. This reduction was mostly driven by lower impairment from the
In Wealth and International, impairment charges decreased by 23%, but the division's charge is still dominated by
We've made terrific progress on reducing
Retail's impairment charge reduced by 28%, with the reduction in the unsecured charge more than offsetting the predicted increase in the secured charge.
The decrease in unsecured was largely a result of the improved quality of new business. The secured impairment charge increased exactly in line with expectations, and mainly reflects a less favorable medium-term outlook for house prices, compared to the outlook that we had at the end of 2010.
In Commercial, well, the numbers are tiny, but we still saw the impairment charge fall by 21%, reflecting the benefits of the lower interest rate environment and our continued prudent credit risk appetite.
Portfolio metrics, including delinquencies and assets under close monitoring, however, remain above normal levels.
So the charges are down as expected, but perhaps, more importantly, there are good solid trends of improving asset quality across the board.
In Retail, the trends which I have shown you before have continued throughout the year, with fewer cases entering arrears compared to 2010 in both the secured and the unsecured portfolios. This shows that our prudent risk appetite and the higher quality of new business is delivering exactly what we expected it would.
In Wholesale and Commercial we've also seen a reduction in newly impaired assets. Even more importantly, though, the really troubled assets have been dealt with in prior periods, and this shows through with the average provision needed on these newly impaired loans being materially lower than in 2010.
In the slide appendix in your pack, there is the usual detailed slide showing the impairment trends by book within the Irish business.
And so to summarize the Group's performance. Well, it's not always easy to summarize a full year's performance into a single sentence, but, despite the volatile items, I see 2011 as a good year of delivery, broadly in line with expectations whilst achieving an above-expectation reduction in the risk profile of our business.
Let me now update you on the profile and management of non-core business.
Despite challenging market conditions, you've heard us say that we achieved a substantial reduction in the non-core portfolios of
Within this, we reduced the
In International, we saw some liquidity return in
The non-core income statement shown here, shows both the impact of the smaller asset base as well as the impact of higher wholesale funding costs, which have taken 45 basis points off the margin.
Losses on asset sales are modest in the context of the reductions achieved, but the main driver of the overall performance is the 28% reduction in impairments.
Non-core loss before tax was better by 7%, with the improvement principally driven by those reductions in impairments and partly by cost, partly offset by lower income and lower fair value unwind.
But the income statement result is just one aspect of the non-core asset management and reduction process. So let's look at the impact on capital of our non-core portfolios.
Despite the continuing impairments and the reduced margin in non-core, the rundown of non-core portfolios in 2011 has been capital generative. The capital consumed by the loss after tax in the non-core business has been more than offset by capital released by the reduction in risk weighted assets from their disposal.
But, of course, the full benefits of the rundown are greater than this, because not only did we achieve significant funding benefits, but we have also avoided future impairments on sold assets, which could have been several hundred million pounds in 2012 alone.
In the news release, we have provided extensive disclosure on our exposures to a number of eurozone countries, but let me give you a brief overview of some of those portfolios, other than the Irish book which we've just looked at.
We reduced our overall exposure to these countries by 26%, with substantial reductions achieved pretty much across the board. As previously reported, our largest exposures in these countries are Retail and Corporate assets and exposures to banking groups.
At interims last year, I gave quite a lot of commentary on the Spanish Corporate and Retail exposures, which I'm not going to repeat here. But we feel that we are well provided and we are not unduly concerned.
Exposures to local banking groups are mainly short-term money market and trading exposures, or money market lines and repo facilities. Such exposures are down 36% on last year and half of the residual exposures are actually backed by covered bonds.
Moving on now to capital liquidity and funding. Well, as you've heard, our core Tier 1 capital ratio improved significantly to 10.8% at the year end. We saw a 13% reduction in risk weighted assets, predominantly, of course, from disposals of higher risk non-core assets. But also benefitting from improvements in the risk profile of our assets and better quality new business, which is clearly reducing, as intended, the capital intensity of our balance sheet.
The implementation of CRD III was exactly as predicted a year ago; reducing our core Tier 1 capital ratio by about 20 basis points.
The direct benefit of this risk reduction is that, despite the effects of the statutory loss, including, of course, the PPI provision, our core Tier 1 capital ratio improved by 60 basis points and our total capital ratio improved to 15.6%; clearly a nice and strong position.
Let me now give you an update on the impacts that we anticipate from the implantation of CRD IV. Well, the top bar here shows that we expect the
Looking further into the future, the transitional rules which phase in the new core Tier 1 deductions will start in
If we apply these future rules to a static balance sheet, then these would reduce our core Tier 1 ratio by about 0.25% per annum, due mainly to the insurance deduction and other transitional adjustments, including excess expected loss. These are akin to permanent capital reductions, but, of course, will take seven years to be implemented.
Any residual deferred tax assets relating to trading losses that may still be on our balance sheet in 2014 would reduce the core Tier 1 ratio in stages over that same five-year transition period. But the full value of these today on our static balance sheet is about 1.6%.
So if we did a fully loaded CRD IV assessment on our core Tier 1 today, the chart tells us that we'd get to about 7.1%, and, of course, this excludes the implied 2.2% benefit from our cocos.
But this isn't the real story, for a number of reasons. The transitional rules are there for a purpose, including to deal with what are, in effect, timing differences. And I see the value of our tax losses purely as a timing difference, with the value of these losses being there for the benefit of the Bank and shareholders over the next few years.
These impact illustrations assume a static balance sheet, but, as you know, our business is not static. We will see further RWA reductions from non-core asset disposals, and we are confident of improving earnings. So the overall result will be a very manageable transition to the new world; one in which we will always maintain modest, but prudent, levels of capital in excess of regulatory requirements.
Turning now to funding. As Antonio mentioned earlier, we have seen good growth in relationship deposits. This, together with lower loan balances, has improved the loan-to-deposit ratio to 135% at year end, and we expect this will continue to improve in the future.
Moving on to wholesale funding. Well, the combination of right sizing the balance sheet and continued growth in customer deposits has seen the Group's wholesale funding requirement reduce materially in the past few years.
Total wholesale funding reduced 16% last year to
Last year we exceeded our 2011 issuance target with over
In addition, our reduced requirements now falls in line with our public term issuance plans of
But we also continue to maintain a strong liquidity position. And our primary liquidity portfolio at the yearend was
And so in summary, the Group delivered a combined businesses' performance in 2011 broadly in line with expectations, despite the challenging external environment.
The core business delivered a resilient performance, with strong funding improvements, resulting in a very good margin performance.
Non-core asset reductions were fantastic, releasing capital to support core business growth in the future.
Our actions in 2011 have materially reduced the risks in our balance sheet, strengthened our core Tier 1 ratio and further improved our funding position.
Well, that's enough from me. And now I'll hand you over to Mark.
So let's start with costs. As Tim said, total costs reduced by 4% absolutely. At the operating expense level, excluding major increases in the
This excellent result reflects the delivery of planned integration synergies, with in-year integration cost savings in 2011 rising to
We announced in the final quarter of last year that we'd achieved our integration goal of
Rather than look at our performance on costs just for one year, it's worth looking at the longer-term trend. This slide shows the progression of costs for
The principal driver is integration savings which have passed through to the bottom line. That number of
Now these reductions have been partly offset by cost increases, reflecting bank levy, wage inflation,
And last, but not least, the early mobilization of Simplification has now delivered
All-in-all, I hope you agree this shows a strong downward momentum in costs, and evidences our determination to deliver benefits and savings through to the bottom line.
Now for a closer look at how the Simplification program is going. Simplification is central to our strategy of becoming the best bank for customers. Customers will experience processes with fewer steps, more automation and more transparent outcomes. Fewer errors will mean fewer complaints and increased brand consideration. Antonio has already detailed the progress we're making on reducing complaints. We're determined that Simplification will enable us to reduce those FSA-reportable complaints to less than one per 1,000 in 2014.
Simplification will also generate significant financial benefits. I've previously described to you the iceberg effect, where simpler processes and fewer areas of complaints leads to a virtuous circle of lower-cost primary processes, generating fewer demands for secondary processes of error correction and re-work, complaint handling and so on.
And whilst the majority of Simplification benefits will flow to the bottom line, approximately one-third of the benefits over the life of the program will be used to fund investment in our strategic growth initiatives.
For colleagues, Simplification will eliminate low-value tasks, increase cross skilling, and free up time to spend with customers to deepen relationships and drive income growth.
Now, hopefully, you recognize this slide from last year. Simplification is organized into four key streams; operations and processes, sourcing, organization and channels and products.
You'll see that at the outset of the program last year, we'd identified 111 initiatives. Now that number's grown to 183. This reflects the addition of new ideas, as well as the deletion of some ideas that didn't provide the right financial payback. And it also reflects the added granularity of our plans, as we move into delivery mode.
With the core technical aspects of integration now complete, we've been able to move substantial and highly-skilled resources onto our program of transforming the business and technology, harnessing automation and workflow tools, simplifying and driving out costs.
I reported last time on the cost management approach that we had implemented. This is now maturing into a very effective process, bringing both detail and control to all aspects of our cost base. 14 dedicated cost management units, each responsible for a single type of cost, now review and control all costs and budgets on an end-to-end basis, across all divisions and businesses, reporting to a Group Cost Board, chaired by me.
We've extended this process now to look at costs which are treated as netting off income; for example, insurance claims.
It's the success we've had in 2011 in reducing the operating expenses, the good early mobilization of the program, the increasing detail and definition of our plans and the growing maturity of our cost management approach, that, as Antonio has already outlined, leads us to increase our cost target to
So let me talk a bit more about that early mobilization. I've already highlighted the benefits in 2011. These run-rate benefits were delivered, primarily, through our sourcing and organization work streams.
By the year end, we'd announced 2,098 role reductions and achieved 1,665 job savings. I'm pleased to say we continue to achieve over half of our role reductions through natural attrition and redeployment.
We've centralized our Corporate functions, such as HR, finance and risk, removing duplication of activity and strengthening control. In the Wholesale and Retail banks, we've increased leadership spans of control, and reduced management roles.
All these restructures demonstrate what I talked to you about last time, in terms of flattening the organization to a seven by 10 structure. That is seven layers from top to bottom, with average bands of control of 10 or more. This gives increased personal accountability and promotes a high-performance culture.
And we've made good progress on our plans to reduce the number of suppliers we have; rationalizing contracts and removing 2,351 suppliers since
Now, in terms of the heavy lifting part of the program aimed at re-engineering our processes, we've completed a mapping of all our processes, and this is it. So don't worry, you're not meant to be able to read it, but it does show you the core processes of the Bank.
Now, behind each of those boxes, we've mapped how many times a day we do the process, where it's done, who does it, the time they take, the costs involved, the error rates involved, the complaints we get. Now, the data's not 100% complete, but it is good enough to help us identify the target areas for our improvement.
Now, we've actually mapped 910 processes, and that covers the day-to-day activity of over 85,000 of our employees. Now, not surprisingly for a bank, around 16,000 employees are in the top five processes, which, surprise, surprise, are paying money in, taking it out, opening accounts, answering queries and sales prospecting.
Now, clearly, we can't fix all 900-plus processes simultaneously. That's like trying to boil the ocean. But the top 125 processes account for the work of around 68,000 of our colleagues, so that's where we're directing our focus, as we believe this will do the most to simplify our customer service, and enable us to maximize cost savings' potential.
We'll take one of three approaches to simplifying those processes. Where possible, we're going to automate. So that once the button is pressed, knowledging systems will execute the request with no further human intervention. We estimate that around 30% of processes could be handled in this way.
Now if full automation's not appropriate, we'll harness technology, like image and workflow, so the work is sent to the right place, first time, for fulfillment.
And finally, there are times when automation just isn't appropriate; for example, dealing with bereavement. So we'll have centers of excellence where trained and highly skilled colleagues can provide the right support for customers.
We're in the process of finalizing our design choices for key processes, and will shortly mobilize the first 30 work streams, making changes on the ground. We've already begun to build the technical infrastructure and architecture to support these programs.
Now I mentioned earlier we're in delivery mode. Since the end of the year, we've announced a further 1,690 role reductions, bringing the total for the program to date to 3,700. And let me give you a few examples of things that are coming in the next few months.
Antonio has referred to our very successful cash ISA campaign, but our underlying cash ISA process is extremely manual. This month we have launched an improved process, supported by elements of automation, that will significantly improve this year's customer experience and our efficiency for the tax year end coming soon. In quarter 4 of this year, we intend to further reduce the ISA switching time frames, and to have a fully automated process by 2013.
In account transfer, or switchers, that's accounts transferring into the Group from competitors, which I'm very pleased to say, is a high volume activity, in April, we will introduce a new transfer process. This will reduce the time to transfer by up to 30%, reduce our data entry by up to 65% and we think would eliminate errors by 50%.
Now, as Antonio's mentioned, the online channels really continue to grow rapidly, with over 1.5 million downloads of the mobile app. At one point in December last year, LBG (technical difficulty) were number 1, 2 and 3 most popular free financial downloads in the
And this is leading to increased usage. So on the first business day of 2012, we saw a record 3.7 million customer logons through the Internet and mobile. Now that's a staggering number and far more than any daily volume of branch or telephone traffic.
And there's a lot more to come from Simplification. It ranges from improvements to the functionality of our telephone service, right through to re-engineering the way we clean our major offices. This latter improvement, for example, should give us a reduction of 15% in cleaning costs.
So, to summarize, I believe we've made a good start to Simplification. Integration delivered its synergies of
We've taken the integration savings through to the bottom line, so our total cost base is reduced by 13% since 2008 and our operating costs by 6% in 2011 alone. All of this supported by a tighter and more disciplined approach to the management of costs.
Our early deliverables from Simplification have already generated
And finally, with this strong momentum, we're now targeting an additional
Thank you. I'd now like to hand back to Antonio.
Turning first to the economic environments. The outlook for the
As a result, we expect
In terms of the regulatory environment, the publication of the ICB's final report and the Government's response to it have represented significant steps in providing greater clarity.
On capital, the proposals are consistent with the targets we set in the strategic review and, although much work remains to be done on the details of the implementation, we are on track to achieve the recommended capital levels, as well as to comply with the requirements of CRD IV.
We also welcome the Government's endorsement of the ICB proposals to ring fence retail banking operations as part of a wider regulatory framework. As a predominant retail and commercial bank, we would expect to be less affected by the implementation of a ring fence than other market participants.
However, we believe it is important for any transition period to be flexible in order to minimize any impact on economic growth and to enable banks to implement the required structural changes.
Finally, the Retail Distribution Review is expected to have a significant impact on the way in which financial services are delivered in the
Now moving onto guidance. In 2012, given the economic outlook and non-core asset reductions, subdued demand in the core book, higher wholesale funding costs and interest rates remaining low, we expect our Banking net interest margin to decrease in 2012 by around the same amount as we experienced in 2011.
In terms of the 2012 margin shape, we would expect significant reductions during the first half of 2012 and then flattening in the second half. We expect our total income to be lower than in 2011 and we would continue to expect subdued demands in the core loan book.
In terms of costs, we expect to reduce nominal costs further, driven by Simplification. We also expect to see a further decline in the Group impairment charge in similar percentage terms to the reduction we saw in 2011, as a result of further asset quality improvements across all divisions, with the largest improvement coming from International.
We also expect the benefit from fair value unwinds to reduce to around
We expect to continue to strengthen our balance sheet in 2012 by a further reduction in non-core assets of around
For the medium term, we remain confident that the targets we set out in the strategic review in
We continue to expect to deliver our balance sheet, costs and impairment targets by the end of 2014, and, in some cases, sooner. As you have heard, we have increased our cost-savings target by a further
So, to summarize, we are building a bank which has the balance sheet strength, efficiency and customer franchise to continue to deliver a resilient performance in challenging market conditions.
Given we are likely to have lower interest rates for longer and higher regulatory costs, along with deleveraging in credit markets, it will be those banks who can create competitive advantage through a lower risk premium, combined with best-in-class efficiency, who will achieve superior returns and will capture the opportunities as economic conditions will improve.
Thank you very much for listening and let me now turn to questions and answers, which Kate will facilitate.
Questions and Answers
KATE O'NEILL, MANAGING DIRECTOR, IR,
And the second question was on CRE slotting and, obviously,
But we are targeting, and have improved significantly, our positioning in our core segments. For example, in savings, as I showed you, we got probably a 50% market share of net savings flows. In terms of mortgages, we have had a 20% market share of gross mortgage lending and in the core segment of first-time buyers, 24%. Nevertheless, as you said, given that customers are repaying on an accelerated way mortgages, the total mortgage book goes down.
And in SMEs, which is our other core segment, we have increased net lending by 3%, while the market has gone down by 6%. So here we have a significant market share improvement.
Our objectives, all subject to market conditions and competitive conditions, is to keep very strong market shares in our core segments, such as that when those markets recover, we will recover and grow with them.
So in this context how do I see 2012, which is the core of your question. I think that the mortgage market is going to behave very much in line with this year; more or less flat as you were asking. I can see SME's net lending to continue to be negative but we have publicly committed, and I'm very confident about it, that we will again provide at least
And on the Corporate space, we have been prioritizing according to the segments, where we have been focusing more on medium corporates and the ones which are more attractive, and less focused on the ones where we have less margins versus our cost of funding and on the higher segments, which I think will be the similar picture next year, but less pronounced because, as you know, the market overall in Corporates is also going down 5%.
So that's why I said that in 2012 I continue to foresee subdued demands in our core book, but keeping very good market shares in our key segments and in some of them, as SME for example, continue to have positive net lending in spite of a negative market growth as a whole.
Relating to your second question of CRE slotting, the impact in ourselves is not as high as
JUAN COLOMBAS, CHIEF RISK OFFICER,
This is not exactly (inaudible). We are incorporating this number also what will be in the impact on the excess of expected loss through the implementation. But what we think — I mean, to summarize, the number in our single one, the impact would be equivalent to other (inaudible) less than
So if one looks into — not so much 2012 but beyond, what does it take for these factors to start to moderate on the — so if you look at the slide that you gave, I think, on page 19 of the slide pack, have we seen the end of the wholesale funding pressures this year? What happens if rates stay low? What are the hedging impacts that you have and how do they run off?
So I'm looking for some kind of indications as to what it takes for this progressive decline in the margin to ameliorate in subsequent years?
In terms of '12 versus '11, to position this first, the fact that we think that the margin will decrease more significantly in the first half and then flatten in the second half is mainly due to the fact that, in the comparison with '11, we have on the first six months of '11 the cost of the SLS, which was extremely low, as you know. So it was like a kind of subsidy, which in the comparison makes the comparison negative.
And on the other hand, we had the wholesale cost of funding increasing especially in the second half of the year, when the crisis started in the summer. And we have also increased the amount of liquid assets we hold on the balance sheet in the second half of the year as well and those assets have costs because, as you know, funding them has a negative cost for us.
As we go further, what is our strategy in terms of what we control and how do we see the factors that we do not control? So from the second half of '12 onwards, we will no longer have the distortion on the comparison, both from the liquid assets from and the SLS effects of '11.
Still the wholesale cost of funding we think it will continue to be high, although with all the improvements we made in terms of capital liquidity we would expect it, on a relative basis, to start trending lower because we'll need less and less wholesale funding and our position is improving sustainably.
But we are thinking, as I told you, that it will remain high and, therefore, that's a negative effect in terms of margin, but progressively lower because we will need less and less wholesale funding.
And in terms of our core book, which, as I showed you in one of my slides, we have a deliberate policy of offsetting the higher cost of deposits and mix on the liability side with the assets re-pricing of the mix on the asset side. And we expect that equation to continue to hold and the more the core represents of the total Bank, the more important that picture is versus the picture of the non-core, where basically all the non-core is wholesale funded.
And then the second question is sort of a follow on from Robert's question on net interest margin. I wonder whether you'd comment on whether the shape of number compression in the next six months is similar to what you've seen in the past 12, as far as the split between core and non-core is concerned.
Obviously the NII in non-core is a very small number and the number's already down 45 bps, 46 bps in the last 12 months. So if you could just talk about how you see core margin evolving over the next 12, that would be great?
Let me put it like this. It is definitely not a flat line with a hockey stick at the end. It is a much more linear increase but ,nevertheless, the heavy lifting parts I referred to, they do take time to build and mature. So there's a reasonable linear increase with some acceleration towards the back end, as they — the IT development, which takes sometimes a year or more; you do it, you implement it, you then have to really exploit those things. So it is going to gather pace through there, but it's definitely not a hockey stick.
But to give you a bit more insight on the flavor of 2011, as you saw on my presentation, and on Tim's as well, our core margin has only decreased by 6 basis points. Because, as I showed in my slide, we were able to fully offset the higher cost of deposits with the mix on the deposits and with a re-pricing of the assets, and we expect that to continue.
Therefore on the core book, the only impact that makes the margin go down is the wholesale cost of funding. So depending on your expectation on wholesale cost of funding and the amount that we will need, which will go down, you can make your own expectation.
On the non-core NIM, which, as you say, we don't find very relevant, the important thing is to look at the non-core assets as a whole.
And as long as we do it, as we have been doing it, holistically and we shed non-core assets in a way that is accretive to capital, as we have committed at the strategy review last year, and at the same time has minimal hits to the balance sheet and therefore increases core Tier 1 as they are liberated and do not originate provisions for the future and finally also release liquidity, that's the holistic equation that we should look at the non-core books.
So very different, as you were saying, from how we look at the core book.
Just on the costs, the last two years the statutory costs have been above
And, as I say I have a second question. Do you want me to do it now or wait?
KATE O'NEILL: No, put it in.
Verde is a different feature. Obviously that's growing, but, again, in the period we're looking at obviously that will be finished in the middle of the period, so it's definitely also going to go away. And, as we've discussed, Simplification, we've outlined the cost there which, when we declared last summer the target cost for the Simplification of
The Simplification is transformational in the sense that it really will move our systems and processes for customer service to a completely different base. So clearly I would expect to be able to continue to improve after that, but I'm not expecting maybe at quite such a heavy pace, or at least if we do we'll be having to generate the equivalent benefits.
So given that we have another
So I think the implication of what you are asking is that, most likely, we will be ahead of target for '14 if this continues at the current pace. But we are going to absolutely privilege the criteria that I told you, which is capital release, which is less provisions for the future, therefore risk and liquidity liberation, very important for the whole liquidity position of the Bank.
In the present market conditions, and last year was very difficult, as we have commented, we are very comfortable we can do at least
Given your cautious outlook on the
And then the second question was a medium-term question, just in terms of your income aspirations. You talked quite a bit today about net interest income, the lower rate environment and deleveraging in the economy, etc. I just wondered, in terms of the non-interest income drivers, given that there was a lot of focus placed on those within the new strategy, how you expect those to proceed versus original expectations back in June. Thank you.
We are cautious about the outlook. I think we all share that the economy is going to be probably flattish this year, and then slow recovery next year. So it will be again a long and difficult recovery, more difficult than everybody would have anticipated a year ago.
But it is as true that we see, across all divisions, very good performance in terms of impairments across the world, and all the leading indicators that we have point in the same direction.
And that's why we are very comfortable when we are guiding you to a same percentage reduction in terms of our Group provisions for 2012, the same as we have in 2011, with especially important contribution from the International division. So that is something which, in terms of the underlying performance of the portfolios, makes us very comfortable.
What are the main reasons behind that comfort, going a bit deeper? And how can they be contracted to, what you say, our cautious outlook on the economy?
Well I think we have to split core and non-core. And when you look at non-core, we start from a base where we have less
And those include almost
So in terms of the non-core, the fact that we reduced 27% our non-core assets, and especially based on risk criteria, is one of the major reasons why there is a significant improvement going forward. Those risky portfolios disappeared.
When we go into the core book, you can see as well from all my slides in all divisions that, although we have been going up — for example SMEs, loans going up 3%, risk weighted assets go down by 3%; in Retail, assets go down 3%, risk weighted assets go down 6% — in all divisions you have the same behavior which means, as Tim also showed, that the new loans that we are getting into the books are less risk and more in line with our more prudent approach to risk, which is the Lloyds heritage type of risk management that Lloyds used to have. And, therefore, the new business has a lower risk premium for the future.
And this will translate as well into lower impairment in spite, and I fully agree, and I was the first to tell it, that we are going to face a very challenging economic environment.
Would you like to add something to this in terms of '11, in terms of what we saw in '11?
But I was really pleased to see the reduction in new to impaired in Wholesale, in Commercial, and the slowing migration to impaired in
JUAN COLOMBAS: Our outlook for '12, as Antonio was saying, is to improve the level of impairments in that (inaudible) book as well. We are monitoring the entries into the, what we call, the Business Support Unit where we treat all the bad assets. And the trend, in terms of entries, are encouraging.
And we see it — when you compare the second half with the first half of 2011, you see significant [effect] reduction in the second half against the first half.
So we think this, together with what Tim is saying, and it is that the level of impairment that we have to charge for the new entries into BSU is lower, that's what is making the equation work.
We are working on the growth initiatives. That's all based on the capital-light projects which will increase OOI further as we go, and we are continued to be committed to achieving around 50% of OOI of our total income over time.
And my second question is that, like RBS, you're on review for downgrade to your P1 rating, and I wondered what impact that would have on your business, and, in particular, what we should expect to see in terms of mitigating measures? Would we expect to see the liquidity pool full? Would we expect to see significant outflows of corporate deposits in short-term wholesale funding? If you could give some color around that, please.
And this is a small amount. We're talking less than 1% in terms of dilution here. But the benefit, obviously, is that it does it in a capital neutral way. And I think in the current environment it's my view, it's our view, that that's probably the right thing to do at this time.
You asked whether that's something you should expect into the future. I think we'll probably do that for this year and then we'll take a rain check and see how we feel about the future next time.
On the second part of your question, yes there's an awful lot of banks in this situation right now, but we've set out in one of the notes deep in the news release today some quite extensive disclosures on what the impact might be. It's very difficult to predict how this is going to be, so we've illustrated what might happen.
We saw virtually no change in patterns from either from corporates or pricing or accessibility to the debt markets in the autumn. And the downgrade had happened then.
And I think it's one of the things that makes me feel very comfortable about it because we're sitting on
Put on top of that the fact that we continued to outperform the market in growing Retail deposits. Add on to that, the fact that we've done
I look at it and I say, with so much uncertainty out there, we're in a very good overall position.
On bad debt, Irish NPL coverage is now at 62%, which is, clearly, very high. I was wondering if you could talk about the outlook, as you see it, for NPL formation in
And just, finally, I was wondering if you could give us a comment on how you see the LTRO. You've clearly got a big funding requirement in non-core. A lot of that's European. It just begs the question why you don't spread the pain of that and use the LTRO, while it's there.
And then, just attached to that, but maybe a little bit different —
KATE O'NEILL: Mike, that's four.
KATE O'NEILL: Please take the microphone away.
So it's far easier to think of it, I think, in terms of the long-term rate of cost decline, on an annual basis. And really, to think about it much more as an annual trend, rather than trying to extrapolate a quarter by four, could lead you to wrong answers.
KATE O'NEILL: It was so long, you've forgotten the rest. LTROs.
So in Wholesale, we have
And, in spite of this level of impairment, we have a coverage ratio of 61%, which is extremely high. So the more you impair the new assets that you impair, normally have a lower coverage ratio. In spite of that, in spite of having impaired almost a whole book, our coverage ratio is 61%.
So for Wholesale, we are comfortable with our current provision levels, in a very bad book. So that's — we feel that we have done the right thing, in terms of recent coverage.
In Retail, the picture is different. So you have seen increased levels of impairments in 2011. We think the overhang on
What we think is that the level of coverage that we have in our impaired assets is very good. So we are in 70% in the mortgage book, in
And, on top of that, we are keeping a very conservative policy, in terms of the recognition of impaired assets. So you compare NPLs of 90%-plus arrears in the mortgage book in
If you do the same with the competitors, the picture is totally different. So it varies from kind of [10%] to kind of [5%]. So we are impairing more, because we are seeing that the level of impairment we have to take is more than the 90%-plus.
So we think that 70% in our case is, again, as it happens in Wholesale, it is a higher level, even when you compare like for like. And the coverage ratio of the competitors is at levels of 50%. So we think we have taken a big hit.
For the next year, for 2012, we think that the situation will continue to deteriorate. But our impairment charge in
But, as you said, we are thinking about our European non-core assets, which are euro based, and where we have more assets than liabilities. And, given those are non-core assets, which we'll run down, most of them, over the next three years, it might make sense, from a risk management and liquidity perspective, to match those assets with using the LTRO in moderate amounts, and have them ring fenced and, therefore, having a much better risk management, in terms of our non-core euro assets. So we are thinking about that.
KATE O'NEILL: There was one on the non-core.
And I might just say, you will find pages 106 to 110 of the appendices particularly fascinating if you want to understand
The one on strategy is related to the Wholesale unit. The Wholesale unit is the only one that has seen the returns coming down this year. The return on risk weighted assets, pre-tax, is 1.4%. That equals an ROE of around 10%, which is not the end of the world, but it's, clearly, diluting the ROE of Retail, Commercial and Wealth, which are all above 15%.
So my question is, probably you are not very happy with a 10% ROE in Wholesale. What are you going to do about that? Are you — and the other problem is that Wholesale is the biggest division, still, in RWA terms. So are you going to decrease Wholesale, in terms of RWAs? Or are you going to substantially increase the returns on that division? Or you are just happy with the other divisions doing the heavy lifting, and Wholesale — and the second question is on capital.
The CRD IV guidance, I think, if I add the DTAs and the insurance, it's now 285 bps. And, if I remember correctly, the last time we talked about this, it was going to be in the region of 200 bps. So am I right? Is the impact, now — are we worse? And, if yes, where are we, with your guidance of being prudently in excess of 10% core Tier 1 FY 2013? Thank you.
Well, obviously, we are not happy with the return on the year of the Wholesale division; obviously, not. On the other hand, we recognize that it was a specially difficult year.
The decrease on the profitability of the unit is a result of both deleveraging on our core corporate customers, on one hand; and second, and specially, very difficult market conditions, which made customers transact less.
And, therefore, our growth initiatives, and our plans of enhancing the share of wallet of fee-based capital-light products was less successful in the year, which we would hope to change.
So in terms of the future, I would separate this in two parts. On the non-core, because there are substantial assets on the non-core division which are Wholesale, we want, as in the other non-core divisions, to share them as soon as possible within the holistic view of balancing liquidity, capital and results on the sale. We have been successful as well on the Wholesale division this year and we plan to do the same and reduce non-core Wholesale as quickly as possibly within this criteria.
In terms of the core part of the business, we have significant growth initiatives in Wholesale, such as the Arena platform launched last year for many markets and foreign exchange transactions, where we have had a substantial increase in terms of volumes, and I can ask Andrew to give you some flavor on that. And we have added initiatives, which take longer, like transaction banking, that require investments in order to generate income. But the strategy for Wholesale, in terms of principals, is very clear.
We do not want, as I said in the strategy review, to build a big investment bank. We do not want to have an equities business. We do not want to have an advisory business. We do not want to have trading. We want to have our Wholesale business focused on [niche] Corporates, focused on our extremely strong positions in SMEs, on the Retail business and help those areas get a bigger share of wallet of those customers, especially products orientated to ROI, because they will be capital-light products.
So those are the principals of the strategy that we have set out in June and those principals, I would say, are even more valid today. In any case, Andrew, I would really like that you said something about the success we've had with the first initiatives with Arena, foreign exchange and the rates business.
We've also expanded our foreign exchange business in the financial institutions and our volumes are up significant there inside our foreign exchange business.
I think the other piece that happens, not just in foreign exchange, but our debt capital markets business. Antonio mentioned earlier that the sterling investment grade bond business, we've had an increased market share there. We've had an increased market share in our lending business aspect as well.
So we've seen growth in our key initiatives in each of them.
The last point to highlight, though, is that these product initiatives are only linked to what our customers want. We're building a platform, we're building capability to serve our customers, and the customers are responding to that.
Comparing that to the 2%, which is five lots of 0.4% that was flagged last summer, of course that five lots of 0.4% didn't include any aspects of the deferred tax at all. The 0.4% in each year was made up of two parts; there was 0.2% to do with the insurance deduction and a further 0.2% to do with the other changes, which was principally excess expected loss.
So that 0.4% has now translated into the 0.25% that we have today, which is you're doing five times to get to 1.25%. So it's actually come down. How has it come down?
Well, part of the answer is on page 197 of the news release, where we've actually this year taken a
The reason this time I've been specific on the tax point, although I do regard it as very different, is because we had a number of people reading our tax note in the statutory accounts and coming up with different answers. So I thought I'd just put the number on a slide and make it easy for everybody to understand what it is and that's where you get the 1.6% that you get today.
So actually we've got an improvement in our implied CRD IV position partly through the mitigation actions that we've undertaken and also the fact that the excess expected losses swung against us during the year.
And how does the ability now to pay coupons on regulatory capital make you feel about paying dividends on equity capital?
I think the other part was on when —
We know that the dividend policy is very important for our shareholders; we are absolutely mindful of that. And I think that, when you look at the core book and you see that we have a core book that generates more than
Nevertheless, we are waiting for the full clarity on the ICB discussion with the Treasury in offering implementation and we are waiting for the CRD clarification as well in order to implement those rules as well.
I have to add that, versus what we said in June and we said at the time we wanted to have a capital ratio, a core Tier 1 capital ratio, prudently above 10% when the CRD implementation would start, so in '13, I think all the numbers moved in that direction of what we said a year ago. And if you apply, as you saw in Tim's slide, current CRD rules to the present position, we are already at the core Tier 1 level of 10% for January '13 without any management mitigating actions and without any profit retention.
MIKE TRIPPITT, ANALYST, ORIEL SECURITIES: Mike Trippitt at Oriel. Two questions, I'm still trying to understand — within the Retail division you talk about impairments up because of the — your outlook on house prices. Yet the risk weighting on that book is down. And I'm just trying to square that with now, as you just pointed out, Tim, the expected additional losses in the core Tier 1, you've taken a charge in '11. So I'm just trying to square that circle on impairments versus risk weighting?
And the second question is on non-core. As you progress through that run off, I'm just trying to understand what — how the loss — what I'm trying to understand is what the capital released would be in '12, because if funding costs are going up, presumably your opportunity cost is higher on that book. So I'm just trying to — if you could throw a bit of light on that one in terms of capital release?
So for 2012 our expectation, as I just said, is to do again at least half of what we have committed to do up to '14, which will have a benefit, obviously, in terms of the wholesale funding position. But we want, Mike, to keep the other criteria, which is not only to release liquidity but to be capital accretive, as we had committed for the period '12/'14, and we want to have into consideration the hit to the book, which then increase our core Tier 1.
I would — I think you should think along the same lines that we have followed in '11 for 2012 and, given that we have still
Relating to the first part and RWAs, I would ask, as I did on Retail, I'd ask Juan to make a few comments about how they evolve and how you square the circle that you're missing.
JUAN COLOMBAS: Yes, the RWAs in Retail are reducing because the quality of the Retail book is improving. In terms of how these fit with the increase of impairments in 2011 in the mortgage book, in — what we have done in '11 is to change our outlook for the house prices for the future, and that was the reason of increase — that was the reason we have increased the coverage in the mortgage book from 23% to 25.6%.
So for '12, so what that mean in terms of performance of the portfolio for the future, what — you can see in the appendixes information that we have provided that the mainstream and buy-to-let book are performing very well and the specialist book in the first half of '11 increased arrears; in the second half it has flattened.
And then — and it is a book that at some point it will have to season because it is a closed book since 2009; it has happened three years since we closed it. So at some point we should start to see a decrease in the level of new arrears in this book. And — but, at the same time, as Antonio was mentioning, the outlook for the economy is not positive, unemployment could rise in '12 and '13, and, therefore, we are keeping a cautious view of the Retail book for 2012.
JUAN COLOMBAS: The biggest improvement in Retail is coming from the unsecured book, where, in '11, we have seen significant improvement in the level of impairment charge. For '12, our expectation is to continue with this improvement.
This is an interplay between the assets that have run off during the year and fair value. So, at the start of the year, the — we didn't have an overall excess expected loss and, obviously, expected losses were more than fully provided by the impairments on the balance sheet and the fair value provisions, so the excess was zero; there wasn't one.
One of the benefits of running off — well, I suppose it's not a benefit is it? One of the effects of running off non-core assets that are very well provided, we had the huge benefit of turning them into cash and liberating capital, of course. But we've actually had exactly the predicted uncovering, if you like, of an excess expected loss on the rest of the book, and that's the
That's what I was predicting would happen when we were giving the guidance on CRD IV, to come back to Arturo's question, when we were looking at Basel III impacts last summer and in February of last year and that's coming through now, as we expected. So the future, uncovered is reduced.
And secondly, I was wondering if you might be able to talk about your restructuring policy around loans in the Wholesale division or in the Corporate division. Yesterday, we saw at RBS roughly
In terms of Verde, as you know, we are in exclusive talks with the
We are progressing well, together with the
Relating to the restructuring policies on the Wholesale division, can you comment, Juan?
JUAN COLOMBAS: Yes. What I can tell you about how we manage the restructure of the loans in the Corporate book, everything is done through the Business Support Unit entirely. So — and policies that we are forming in the Business Support Unit are, I think, very prudent; not only in the way we do it, also in the way we recognize it and we keep it until we are totally sure that it is sorted.
And given the commentary that we hear from politicians, from the ICB, from consumer watchdogs about
And then the second question is just on Verde, and it's just in terms of your preliminary assessment when you came to the view of choosing the Co-op as your preferred option.
I'm just interested in how you think that they might be able to fund the bid, on the basis that they're a mutual organization with a core Tier 1 ratio sub-10%, which likes other mutuals. So I'm just interested in how you gain comfort that they can back it up with the money.
Everything that you asked is obviously being taken into consideration on the negotiations we are having.
Relating to Retail, as I showed in my slides, the return on risk weighted assets in Retail increased from 2.4% to 2.8%. That is the pre-tax return on risk weighted assets. So, if you look on an after-tax, at-tax basis, it would come to about 20%, 21%, which we think, that for a retail business in the present market conditions, is absolutely fine.
We have to go, if you put now the political question or the social question, into the future. What I would answer to you is the following. As I said in my closing remarks, I strongly believe that we are going to go through a period of lower interest rates for longer, which normally affects Retail negatively. At the same time, you are going to go through a period of higher regulatory costs and scrutiny and off a deleveraging customer base, because that versus GDP or income is too high.
So, in this context, what will be critical, in my perspective, is to offer transparent products to customers, well priced, that offer superior value for money. And where the winners will be, as I said in my concluding remarks, is on building a competitive cost advantage in terms of costs, by being able to deliver the same value for money for customers with a more efficient machine or factory, which is what Mark showed you, and, secondly, building a lower risk premium going forwards, getting lower risk assets into the book in a sustainable way, which are the points that Juan has been asking.
And I think we have made major progress on those and I think when you combine both those two, if you assume the same environment I'm telling you, that's what will make the difference and those two criteria will differentiate the banks that will have superior returns from the ones who don't.
It will not be an income equation, from my point of view. It will be a cost and risk premium equation for the foreseeable future.
KATE O'NEILL: Okay, in the interests of time, I think that's all we've got for questions today. So thanks for that and I see you, Tom, but thank you again, and I'll pass over to Antonio to end the session. Thank you.
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