Lloyds Banking Group(LYG) - 2025 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Statutory profit after tax for the first half was £2.5 billion, with a return on tangible equity of 14.1% [16] - Net income increased by 6% year-on-year to £8.9 billion, driven by growth in net interest income and a 9% increase in other operating income [17] - Operating costs for the first half were £4.9 billion, up 4% year-on-year, in line with expectations [17] Business Line Data and Key Metrics Changes - Retail lending balances increased by £3.1 billion, with the mortgage book up £8 billion since March [19] - Commercial lending balances also saw growth, particularly in infrastructure and SPG lending [20] - Total deposits grew by £11.2 billion or 2% to £494 billion, with retail deposits up £3.7 billion [29] Market Data and Key Metrics Changes - The UK economy is forecasted to remain resilient but slower in growth, with household and business finances strengthening [6][8] - The government is focusing on growth through significant investments in high-potential sectors, which may benefit the banking sector [8] - The structural hedge notional increased to £244 billion, supporting income growth [31] Company Strategy and Development Direction - The company is focused on supporting the housing sector, having lent over £8 billion to first-time buyers in the first half [5] - Strategic initiatives are expected to deliver over £1.5 billion in additional revenues by 2026, with £1 billion already delivered on an annualized basis [11] - The company aims to maintain a cost-to-income ratio below 50% and generate over 200 basis points of capital by 2026 [12] Management's Comments on Operating Environment and Future Outlook - Management remains confident in delivering higher, sustainable returns and reaffirmed guidance for 2025 [3][15] - The economic environment is challenging but shows signs of improvement, with business confidence above long-term averages [7] - The company expects to grow faster than the wider economy by focusing on housing, transition finance, and infrastructure [9] Other Important Information - The interim dividend was increased by 15% to 1.22p per share, reflecting strong capital generation [47] - The company has undertaken significant share buyback programs, reducing the share count by approximately 16% since the end of 2021 [47] Q&A Session Summary Question: On mortgage spreads and back-to-front book mortgage spread churn - Management noted that mortgage spreads in Q2 were around 70 basis points, slightly tighter than Q1, and expect similar patterns to continue into Q3 [58][60] Question: On deposits and PCA outflows - Management confirmed that PCA outflows were down £700 million over the half, with strong ISA season performance contributing to overall deposit growth [63][64] Question: On structural hedge contribution and mortgage volume expectations - Management indicated that structural hedge contributions are expected to be £1.2 billion higher in 2025 than in 2024, with confidence in the hedge increasing due to locked-in volumes [73][76] - The FCA affordability changes are expected to positively impact housing market prospects and mortgage volumes [78][80] Question: On non-banking NII headwind and commercial deposit growth - Management stated that non-banking net interest income trends are stable, with no alarming changes expected [88] - Commercial deposit growth is driven by targeted sectors, with some uncertainty expected to reverse in the coming periods [86]