Lloyds Banking Group PLC ADR LYG
Q4 2012 Earnings Call Transcript
Transcript Call Date 03/01/2013

Antonio Horta-Osorio - Group Chief Executive: Good morning everyone. Thank you for joining us for our 2012 Results Presentation. In the first part of my presentation, I will give an overview of our 2012 financial performance and describe the substantial progress we have made on our three to five-year journey to become the best bank for customers. George, our Group Finance Director will then give you the detail behind our 2012 financial performance and Mark, our Group Operations Director, will cover simplification and cost. I'll return briefly to summarize and cover our expectation on 2013 and beyond.

We have significantly improved the Group's underlying performance in 2012 by approximately GBP2 billion and our core business continues to deliver strong returns above the cost of equity. I believe we have a very strong core franchise in place and the work we have done so far throughout the year including a further 5% reduction in costs leaves us well-positioned for future growth.

We have continued to strengthen and derisk the balance sheet. We have now reached the loan to deposit ratio over 121% for the Group and 101% for the core business and in 2012, we reduced our noncore portfolio by almost a third to GBP100 billion, all significantly ahead of plan.

I remain confident in our capital position, and we have continued to improve our capital ratios both on current rules and on the fully loaded CRD IV basis, in spite of the additional legacy provisions. Whilst we have continued to make progress, I am of course disappointed that legacy issues, including PPI, have continued to impact our statutory performance negatively during the year. We remain committed to resolving these issues as soon as possible.

We have also made good progress on Project Verde. From this summer we expect Verde to be operating as a separate business, the TSB Bank within the Group. This will allow us to continually sell to the cooperative group, or if required pursue our plan B, an IPO, and therefore ensure we obtain best value for our shareholders, as well as certainty and also for our customers and colleagues.

As the largest Retail and Commercial Bank in the U.K., our success and of the British economy have been extricable linked, as I announced here many times. We are prioritizing actions which will stimulate economic growth and we were therefore the first Bank to access the Funding for Lending scheme in September.

We have committed in excess of GBP11 billion in gross funds under the scheme to businesses and households since the inception of the scheme in September having drawn GBP3 million so far under the scheme.

Our support for U.K. SME customers is underlined by our net lending which for the second year running grew by 4% in a market that contracted 4%.

Now to an overview of our financial performance in 2012. Group profit and returns increased substantially last year. This is testament to the actions we have taken in simplifying and de-risking our business model. Total cost reductions and impairments fell by 42%, driven by a further improvement in credit quality with impairments as a percentage of our average advances falling by 60 basis points around 1%. These improvements primarily driven by the substantial reduction in non-core assets more than offset the expected decline in income given lower margins in line with our guidance as a result of higher funding costs.

As you will hear from George, we have seen encouraging signs of greater stability in both income and margin as the year has progressed. These improvements in underlying performance means that we report a much reduced statutory loss for the year despite further significant provisions from legacy issues.

On the core business, we delivered the robust performance in 2012 in spite of the subdued environment. We had further reductions in costs and impairments which broadly offsets an 8% fall in income. This resulted in a further 10 basis points increase in the return on core risk-weighted assets to 2.56%, given lower RWAs.

Turning now to the balance sheet; in 2012 we delivered above market deposit growth of 4% through our innovative multi-brands customer-focused products. This together with our non-core asset reduction has allowed us to achieve our loan to deposit ratio targets two years ahead of schedule, which represents the completion of our funding and liquidity transformation.

As you will hear in more detail from George, we have made further substantial capital accretive non-core reductions in the fourth quarter, which have further reduced risk. This progress combined with the transformation of our founding and liquidity position leaves us well-positioned to lend and to support the U.K. economy whilst continuing to improve our capital ratios. We have a strongly capital generative business and in 2012, we further improved our capital ratio. Our Core Tier 1 ratio increased by over 1% to 12.0% and the fully loaded CRD IV ratio increased to 8.1% principally as a result of non-core asset reductions and management profits and despite taking further provisions for legacy issues. Our achievements in fundamentally transforming and derisking the Group's balance sheet have clearly not being without costs as George will mention, However, as already highlighted our core risk-adjusted returns continued to grow as we improve the risk return profile of the Group.

I will now cover our core divisional performance and returns in more detail. In Retail, we have made good progress in driving performance. As a result, we have further increased profits and returns with underlying profits increasing by 21%. This was driven by strong cost control and a significant reduction in impairments that more than offset a 3% reduction in income.

Credit performance continued to be strong, considering the economic environment. This was supported by our sustainable approach to risk focusing on lending prudently and to existing customers and also the low interest rate environment. We continued to focus on areas where we can deliver further growth. In 2012, we supported the first time buyer markets lending to one in four first-time buyers, we have now increased this commitment for 2013. In addition, we delivered strong growth in customer deposit balances and attracted funds from almost one in every four service. For 2013 and beyond given the good work then so far we will also start to show growth where we are underrepresented, such as in personal loans and in credit cards.

As a result of the achievements in SMEs over the past two years, we created our new Commercial Banking division in the final quarter of 2012. This brings together our previous wholesale division focus on U.K. midmarket and corporate businesses and our commercial business focus on SMEs in order to transfer best practices across areas and accelerate our core business growth with new markets and corporate clients.

Through these, we will also create additional simplicity and generate cost savings leading to greater capital efficiency and improved returns. I have given you a brief introduction for the division here today, but we will be providing an in-depth insight to the business during our Commercial Banking investor events to be held next month and for which you will receive an invitation shortly. We continue to support our U.K. SME customers with 4% growth in loans in 2012 against the market that shrank by 4% as I said. This no means a cumulative net lending of 7% over the past two years, against the market that fell by 8%.

Profit and returns rose as we delivered further reduction in costs which were down 3% and the risk with impairments down 33% causing both underlying profit and returns to increase in the year.

In Wholesale, we saw significant reduction in impairments, down 40% and then improvement in other income, which offset much of the effect of lower net interest income from subdued demand and higher funding costs. Costs were broadly flat as we continued to increase investments. Overall, returns were broadly stable despite a small fall in profits as a result of a reduction in RWAs in this business.

Now turning to Wealth, Asset Finance and International, where we achieved a strong 27% increase in profits driven by our focus on growth areas and further cost reductions.

In Wealth, core underlying profit increased by 25%, with income growing despite subdued investment markets. We believe that we have a strong growth opportunity in Wealth and expect to continue to leverage our offering as a relationship bank and market share through increased internal customer (technical difficulty) and new external customers.

In Asset Finance, U.K. profits increased by 13% as we focus on the growth of higher-margin areas, such as motor finance, where the volume of new business increased by 11% and in the Lex Autolease our market share – our market-leading contract hire business delivers also growth by 11%.

Regarding Insurance, during 2012 we brought together UK Life, pensions and investments and general insurance into one insurance business. This has led to a cost reduction of 8% and will enable us to drive further synergies between Insurance and the rest of the Group. We are also actively managing the balance sheets as we look to maximize capital efficiencies between the Group and the division.

Most of the fall in underlying profits reflects the subdued economic environment, which drove lower return assumptions on our insurance portfolios, as well as a severe adverse weather we experienced last year. However, the work we have then in reshaping the business means that we are well-positioned to focus on growth markets and optimize opportunities arising from regulatory changes. We one of the market leaders for corporate pensions and the investment in our annuities proposition will mean we can compete more effectively in an increasingly open market.

Moving on from divisional performance, and I would like to focus on how we are building the best bank for customers. As I mentioned at the start of the presentation, the Group is now in a far stronger position than it was 18 months ago. We have reshaped our portfolio by focusing in the U.K. economy and by lowering noncore assets by almost half. We have completed the transformation of our funding and liquidity positions. We have significantly simplify the Group from the customers' point of view and at an accelerating pace as you will hear from Mark and this is generating GBP2 billion of capital which we are reinvesting in supporting future growth across the Group.

As an example, to support our personal customers, we have further invested in and developed our distribution channels. We have upgraded our service on the high streets by refurbishing 421 branches and extending opening hours. Our digital proposition continues to improve, driving growth to 9.5 million online users and 3.3 million users of our mobile service from zero users, only 18 month ago.

These improvements are increasingly being reflective in customer service. Over 2012, based on performance across Branch, Telephone and Internet Banking, Lloyds TSB has been the leading High Street bank for customer service. Our service show that Halifax and Bank of Scotland have significantly climbed in the ratings.

To improve the experience for our U.K. wealth customers, we launched the Private Banking Client onboarding service. This has streamlined the referral process both for customers and colleagues with the 115,000 referrals into our U.K. wealth business in 2012 and these are further step in maximizing opportunities for growth.

We have delivered a number of initiatives for our commercial customers. To further enhance our offering of capital-efficient products, we have continued to invest in debt capital markets offerings and also our Transaction Banking capabilities, where the number of clients migrating to our foreign exchange and money market e-portal 'Arena' tripled in 2012.

In Insurance, we have continued to invest in areas where we are building a competitive advantage, such as corporate pensions and annuities as I referred to you before. Our strong proposition has enabled to achieve the 23% growth in corporate pensions in 2012. We have extended our current product range across annuities and protection and are well-positioned for opportunities arising from the Retail Distribution Review. All these actions will be key drivers of our future performance and are central to achieving our strategy going forward.

Together with investing for the future and supporting the economic recovery, we have made substantial progress last year in delivering our commitments Britain prosper. We have helped more than 55,000 customers buy their first home, and as evidence of our ongoing commitments have increased our 2013 target to helping more than 60,000 first-time buyers.

We are also continuing to develop our product offering, share the equity, ownership schemes. On SMEs, we have continued to grow our net lending in falling markets and have helped over 120,000 startups in 2012 alone exceeding our target. We have renewed our commitment to be net lending positive for SME customers, again in 2013.

We have also expanded our support for mid-market and corporate clients committing GBP1 billion to manufacturing businesses and raising GBP12.8 billion of finance for our global corporate clients in the debt capital markets.

I believe our dedication to helping Britain prosper is underlined by the fact that we were the first to embrace the Funding for Lending scheme, given our responsibility as the largest Retail and Commercial Bank in this country and have already committed GBP11 billion of growth funds passing on the scheme's benefits to our customers.

Before I hand over to George, I want to take a moment to highlight the progress we have made in delivering on our strategic plan. In June 2011 we set our three to five year plan to transform the Group to create a high performing organization on our customers' needs and with a prudent appetite for risk.

We said we would invest in our simple, lower risk customer focus, U.K. retail and Commercial Banking model and would seek superior cost efficiency and the low risk premium than our peers as key competitive advantages.

Over the past 18 months we have progressively accelerated delivery of our strategy and as a result and ahead of our plans and importantly we have then all of these despite a challenging regulatory and economic backdrop as well as significant legacy issues.

As a result of these actions, the Group is now in a far stronger position. We have highlighted here some of our key achievements. Firstly, we have proactively manage the rundown of our non-core portfolio and have now achieved over 90% of our regional non-core reduction targets two years ahead of expectations.

Importantly this has been achieved in a capital accretive matter estimated while also delivering lower impairment charges than we anticipated. We have also exited or announced their exit from 12 out of the 15 countries we target to achieve by 2014 in this first 18 months.

Secondly, our balance sheet is considerably stronger with our Core Tier 1 capital ratio now at 12.0% with two years of above market deposit growth, thanks to our multi-brand strategy and comprehensive pricing, our core loan deposit ratio is now in line with our long-term targets over 100% and the Group achieved the 120% level two years ahead of our original targets. We have also transformed our Wholesale funding position with the reduction of GBP126 billion, mostly in short-term funding which now accounts for GBP51 billion from around and GBP150 billion only 18 months ago. This mean repaying circa GBP20 billion of Wholesale funding each quarter over the last six quarter through deposits growth and non-core reductions.

Thirdly, our drive to enhance simplicity and operational efficiency continues at pace. Through simplification, we have achieved the reduction in our cost base of GBP1 billion since 2010, again achieving our goal two years ahead of targets. Significantly this has been achieved with the substantial increase in customer service as demonstrated by our NPS growth in all brands and by halving complaints in the last two years. Mark will highlight in more detail the significant progress we are making across the Group in a few moments.

The progress we have made in reducing the cost base (technical difficulty) enabling us to execute GBP2 billion of incremental investment behind customer focused growth initiatives, including revitalizing Halifax as a challenger brands and investing in more customer-focused products and services in Retail, Commercial, Wealth and Insurance.

As we said in November 2011, we expect the economic recovery to take longer than what's generally anticipated at the time of the strategic review. However, the progress achieved so far together with the benefits we are seeing from our investment into our core franchise, gives us confidence that we will achieve our income related targets in the medium term, therefore achieving returns above our cost of equity.

I will now handover to George who will talk you through our 2012 financial performance in more detail.

George Culmer - Group Finance Director: Thank you Antonio and good morning everyone. I'll update you on our financial performance and then cover our balance sheet funding, liquidity and capital positions. Starting with the P&L, as you heard from Antonio, in 2012 we delivered a significantly improved performance with reductions in costs and risk more than offsetting the expected lower income.

Group underlying profit improved to GBP2.6 billion with another strong performance in the core business at GBP6.2 billion and a GBP2 billion reduction in non-core losses. Group management profit was GBP4.8 billion and includes the benefit of actions following the movement in yields and credit spreads in the second half of the year. Asset sales comprise gains of GBP3.2 billion from gilt sales as we reposition this portfolio given low yields and locked in our capital position. These gains are partly offset by losses on disposals of noncore assets of GBP660 million, resulting in a net asset sales gain of GBP2.5 billion pounds.

Liability management and own debt volatility were GBP229 million and GBP270 million, respectively and reflect the impact of our tighter spreads and buyback activity. Other volatile items were GBP478 million while the fair value unwind was GBP650 million, well down on last year due to the lower level of impairments. Taken altogether, these items come to some GBP2.2 billion in total, in line with last year and offsetting some of the charges in statutory profit.

Going forward, we will be simplifying our report (technical difficulty). This is the last time we'll be showing management profit as a separate line item and we will focus instead on underlying and statutory profit.

Looking now at income; Group income was GBP18.4 4 billion with a movement on prior year, mainly due to lower average balances which are evenly split between core and noncore, and lower insurance income, primarily due to the changes in economic assumptions that reflect at the half year.

Wholesale funding costs were GBP239 million, higher than last year, while nonrecurring items of GBP233 million predominantly related to some one-off credits received in 2011. Core income was GBP17.3 billion and again was impacted (technical difficulty) IN average balances and increased (technical difficulty).

In terms of quarterly trends, we've seen improvement in the second half with a stabilization of core loans and advances and an improvement in other operating income driving increases in underlying income in both Q3 and Q4.

Looking next to margins; the net interest margin for the year was 1.93% and in line with guidance. Within this the core margin has been very stable at around 2.32, while decline in the noncore margin largely reflects the impact of higher funding costs and in the latter part of the year noncore share of the impact from government bond sales.

As you know, we expect the Group margin to continue the gradual improvement seen in the second half due partly to the decrease in proportion of noncore and the guidance for 2013 is a net interest margin of around 1.98.

On impairments, our performance clearly highlights the impact of our ongoing prudent risk appetite, strong management controls and the de-risking of our portfolios. Impairment charge was GBP5.7 billion 42% lowered than 2011 and significantly ahead of our original guidance of around GBP7.2 billion.

Group AQR was 1.02% for the full year and 0.95% in the second six months, with improvements over the year in both the core and noncore books and with the overall Group ratio again benefiting from the decrease in proportion of noncore.

Impaired loans as a percentage of loans and advances were 8.6% and the average coverage ratio 48.2%. Within this we continue to see strong trends in the core book. The noncore, the reduction in non-retail assets is the main driver in the movement from 34% to 32% for impaired loans, while the coverage ratio increased from 48% to 51%.

We continue to hold high levels of impaired loans and coverage ratios in our key lower quality portfolios. In Ireland, for example, the overall portfolio is 64% impaired with the coverage ratio of 69% up from 62% last year. The Corporate Real Estate BSU 77% of loans are impaired up from 72% last year with the coverage ratio unchanged at 37%.

Looking at performance by division; in Retail, the impairment charge decreased by 36% to GBP1.3 billion driven mainly by continued improvements in our unsecured portfolio.

The unsecured impairment charge was down 41%, reflecting more proactive approach to collections and recoveries and the further strengthening of our credit management. In the secured portfolio, impairments were down 19%, with further reductions in impaired loans driven by an improved performance in the Bank book.

In Commercial Banking the 30% reductions to GBP2.9 billion is largely due to lower charges in the noncore Australasian portfolio, we have now sold most of the quality assets. Then Acquisition Finance where specific large impairments taken in 2011 were not repeated.

In the core book, the 33% year-on-year improvement reflects the good experience in the underlying book and again the nonrecurrence of specific large impairments taken last year.

The Wealth, Asset Finance and International the impairment charge fell by 59% to GBP1.5 billion (technical difficulty) primarily by lower charges in the Irish wholesale portfolio.

With the high credit quality of new lending, the successful management of difficult exposures and the further decrease in non-core, going forward we expect further improvement in asset quality across the Group and a further substantial reduction in the 2013 impairment charge.

Moving now to the statutory result; here we show the movement from management profit to the statutory loss after-tax of GBP1.3 billion. Simplification of Verde cost totaled GBP1.2 billion. Within the simplification cost was GBP676 million with, as you will hear from Mark in a moment, the program contributing run rate cost savings of GBP847 million by the end of 2012. Verde build cost were GBP570 million. The provision for PPI was GBP3.6 million, I'll come back to this in a moment.

Within other regulatory provisions we have provided GBP300 million for the cost of redress, interest rate hedging product. We also associated cost of GBP100 million. Also included here was the GBP150 million provision for German insurance business litigation taken in Q3 and a U.K. retail provision of GBP100 million.

As mentioned at the half year the past service pension credit of GBP250 million rates to move to CPI for discretionary increases within the groups' main pension scheme. Volatility arise in insurance businesses totaled GBP306 million.

Filing the tax charge of 2012 with GBP753 million reflecting the trends seen earlier in the year including the impacts of the reduction in the U.K. Corporation tax rates and changes in life insurance taxation.

On PPI, we've announced the further provision of GBP1.5 billion in Q4 which brings the provision for PPI in 2012 to GBP3.6 billion and the total unutilized provision to GBP2.4 billion. Volume of complaints and cost of contacts and redress continue to trend downwards.

Complaints we see it in Q4 were approximately 20% lower than in Q3 and around 30% lower than in Q2. On monthly payments there is a similar trend with the average monthly spend for Q4 in line with expectations around GBP200 million a reduction of about 25% on Q3.

Going forward we expect the average monthly spend to reduce further in the first half of 2013 to around GBP160 million per month, before reducing again in the second half of the year.

Moving then onto the balance sheet, (technical difficulty) Antonio, we've continued to strengthen our balance sheet and financial position. In 2012, we've grown deposits by GBP17 billion and reduced non-core assets by GBP42 billion. We've also seen a reduction in core lending of GBP12 billion although as previously mentioned it was pleasing to see this stabilize in the second half of the year.

Our liquidity, our balance sheet de-risking and changes to regulation have given us more flexibility, allowing us reduce primary liquid assets by GBP7billion. With these actions, we have been able to reduce our Wholesale funding by GBP81 billion or around one-third in just 12 months. We have also seen 12% reduction in RWAs which is ahead of 8% fall in banking assets due entirely to disposals and de-risking with no benefit from model changes. As Antonio said, all of these actions has not been without cost in terms of lower income and margins, but in so doing, we've fundamentally transformed our risk profile and balance sheet shape.

Looking now at noncore, the noncore portfolio now stands at GBP98 billion significantly ahead of original guidance and we've already met our overall EC asset reduction commitment of GBP181 million, almost two years ahead of the deadline. The GBP42 billion reduction in 2012 includes GBP12 billion of maturities, GBP6 billion of impairments and other movements and GBP24 billion of asset sales which we have continued to achieve in a capital accretive way.

Looking at the reduction by asset type, GBP37 billion was in non-retail portfolios and included GBP14 billion treasury assets, GBP10 billion of other corporate including shipping, aviation and leverage finance, GBP6 billion in U.K. commercial real estate and GBP7 billion reduction in international corporate assets, mostly in our highly impaired Irish and Australasian portfolios. This reduction in non-Retail is reflected in the movement in non-Retail RWAs, which were down 42%, ahead of the 30% reduction achieved last year. For the non-core portfolio as a whole, the fall in RWAs was 33% and in excess of the 30% fall in total non-core assets, a clear evidence that we are not simply selling the low risk elements first.

Going forward, we are targeting a further reduction of non-core assets of GBP20 billion in 2013 and we are on track to achieve our target of a non-core asset portfolio of GBP70 billion or less by the end of 2014, with more than 50% of that being Retail assets.

On funding and liquidity, as already mentioned we have transformed our profile in 2012. Wholesale funding now stands at GBP170 billion with less than 30% having the maturity of less than one-year, compared with total funding of GBP251 billion in 2011, 45% of which matured in less than 12 months. We also fully repaid all debt issued under the U.K. government's credit guarantee scheme and we've just repaid GBP8 billion of LTRO funds.

Our liquidity position remains very strong. In addition to primary liquidity holdings of (technical difficulty) (GBP88 billion), we have significant secondary holdings of GBP117 billion and out total liquid assets represents four times our short-term Wholesale funding compared with less than two times 12 months ago.

The strong position in our reduced Wholesale requirements allowed us to repurchase over GBP15 billion of our term funding in 2012. For 2013, we (envisage) now material Wholesale funding activity, but we will continue to look (attachable/attractive) opportunities. We also look to further optimize our capital structure ahead of the detailed implementation of CRD IV.

Finally on capital. Into '12 we further improved our key ratios, with a Core Tier 1 ratio of 12% up from 10.8% a fully loaded ratio of 8.1%, up from 7.1%. Our total capital ratio of 17.3% is up from 15.6% and is already in access of the ICB's (technical difficulty) recommendation. All ratio benefited from management profit and from RWA reductions in noncore offset by statutory items and other adjustments including, of course, legacy provisions.

Our fully loaded ratio is based on the July 2011 draft rules including Article 45 for insurance capital. Due to benefit of approximately 30 basis points from greater certainty on the resolution for corporate exemptions of CVAs and the definition of default for retail mortgages.

We expect to continue to build our capital ratios in 2013, given our strong core profitability and continued capital accretive noncore reduction. However, I would expect greater intraperiod volatility partly due to the application of revised IAS 19 rules for pension schemes.

As I said, at the half year and Q3, comfortable with our current capital position and outlook, and we are confident of meeting our capital requirements and of course complying fully with the CRD IV.

The concludes my review of the financials and I'd now like to hand over to Mark.

Mark Fisher - Director of Group Operations: Thank you George. Good morning everybody. I'll give you a brief update and our progress with costs simplification. Looking at the total cost of 2012, as Antonio said earlier, we've seen the reduction of GBP539 million or 5% to just over GBP10 billion. This follows a reduction in 2011 of 4%, and I think the strength of our performance here is reinforced when you consider the downward trajectory of the total cost base since 2010, where we delivered GBP1 billion of savings over the period. Indeed since the acquisition of HBOS we will reduce cost by more than GBP2 billion or just under 18%.

We're looking slightly in more detail, you can see that the final saving from integration of GBP177 million and then simplification savings of nearly GBP600 million, which are the primary driver of the overall reduction. This supports the further investment of another GBP170 million in our strategic initiatives, in line with our aim of reinvesting a third of simplification savings back into the business.

Full year cost of GBP10.082 billion take us very close to the cost target of around GBP10 billion by the end of 2014 that we talked about when we launched that strategy in July 2011. So we've effectively hit this target two years early and we now expect total cost for 2013 to be GBP9.8 billion or around that.

As I've said earlier, simplification is a big part of cost reduction in 2012. The annual run rate savings increased by GBP605 million to GBP847 million and we remained bang on track to meet the increased target of GBP1.9 billion run rate savings at the end of 2014 that we announced last year.

I can tell you the program is already paying for itself. The savings delivered so far is already more than the cash invested. Simplification is not just about cost savings, it change in the bank. So I'd like to briefly share with you how that is progressing.

I've talked before about how we're simplifying that we will buy services from outside the Group and we are seeing some really positive results. We reduced the number of suppliers we used by further 4,700 in 2012, bringing the overall numbers down by 41% from over 18,000 to now around 10,500. We are focusing our spend on a smaller number of key suppliers and we now have over 75% to spend in the top 100 suppliers and indeed over 30% with the top 10 (technical difficulty).

We are also concentrating in having partnership based relationship with suppliers rather than transactional, so they better understand our business, provide better solutions at better prices, all of this showing through in very real terms in over GBP300 million of savings from this source to-date.

We're also on track with our plans to consolidate our back-office operations into fewer larger centers of excellence, harnessing technology to ultimately make a move to paperless processing. It gives us more flexibility where we can transfer work easily within and between sites to do with fluctuations in workload. To support these within the larger centers, colleagues are much more multi-skilled and this gives them much more variety in their work.

For customers, we have actually delivered over 200 initiatives to-date. They range from significantly reengineered solutions on key customer moments of truth through to more modest but important changes that make a real difference. These improvements are being noted by our customer. You can see four examples on the screen of services and processes, where we have made significant improvements and I will focus on a couple of these to give you a flavor of what we are achieving.

As Antonio has mentioned, we are making great strides in developing our Internet Banking service. We now have over 9.5 million customers banking online, and on Saturday, December 8, 5.22 a.m. one of our customers living in Surrey decided to log on to the Internet and became our billionth log-on during 2012 and that's the first time we have achieved that. More people are using this service through mobiles, smartphones. We have around 3.3 million active mobile users conducting GBP4.2 million transactions per month. This is impressive when you consider it was only just over a year ago that we launched our mobile banking applications.

Not only are customers benefiting from greater self-service, we will also start to see real progress in the reduction of paper and post, helping us further to reduce costs.

Turning to specific processes, one of the major enhancements we made has been the reengineering of our account switching process the new accounts transferring to the Bank, which I spoke about last year is one of the key perspective deliveries for 2012.

By introducing more automation we've removed 23 process steps, reduced annual rates by two-thirds and complaints by 50%. It's been a key component in the overall net acquisition of more than 170,000 new personal current accounts for the Group in 2012 and that's been particularly important in our Halifax brand supporting a strong challenge of Bank proposition.

We can see on these charts how simplification is making a difference to our customers. On the left you can see the data published only yesterday on banking complaints, which all banks have to report to the regulator.

We have reduced a number of reportable complaints per 1000 accounts by over 50% since the first half of 2010. Given the progress we've made, we are bringing forward our target of one reportable complaint per 1000 accounts from the end of 2014 to the end of this year, a year earlier than planned.

If we look at our customer satisfaction data, we are also seeing real progress. We survey through an independent company around 35,000 customers every month who have recently transacted with us and the chart on the right shows what we call the net promoter score, which essentially reflection the number of customers who would recommend the Bank to others offset by those who would not. What you see from this picture and as well as complaining less, customers are also far more liking now to be talking positively about our brands and our service.

So to summarize, our strong progress on cost (technical difficulty) and we remain ahead of our original targets. This is driven by excellent simplification program, which is not only reducing costs, but building more efficient sustainable platform for the Group and centered on the customer.

Thank you, I'd now like to hand back to Antonio.

Antonio Horta-Osorio - Group Chief Executive: Thank you, Mark. Our strong 2012 progress in a challenging economic and regulatory environment is evidence that we have the right strategy in place to create the best thing for customers and for shareholders that we have the management team to deliver it. What do we expect to see in 2013? We expect to see the U.K. economy grow in 2013, although at a gradual pace as some Eurozone derived uncertainty remains, policy initiative such as the Funding for Lending schemes are helping to encourage this growth. In terms of regulatory matters, we continue to seek further clarity on issues at both European and national levels, including the outcome of CRD IV and upcoming FTC review.

Through our actions, we will continue to achieve cost efficiencies and build a lower risk model across the Group and we will be continuing to invest in our customer focus, U.K. Retail and Commercial Banking model which is based on a very strong multi-brands car franchise. This is not only aligned to be the regulatory reform agenda, it will also enable also to differentiate ourselves from our peers and rebuild trust by focusing on our customer needs, supporting growth in the U.K. economy and addressing legacy issues. I believe we are increasingly well positioned for success but we will not be complacent. We are all well aware as a team that this will have to be demonstrated everyday with every customer at every direction. This is what successful Retail and Commercial Banking is all about.

So what can you expect for 2013? Well, you can expect much of the same and a bit more. We expect substantially lower impairments, allowing underlying profits to increase substantially and with much reduced legacy issues.

In terms of our specific guidance, firstly, we expect NIM to reach around 190 basis points in 2013 in spite of the impact of having sold a substantial part of our (DUKE's) portfolio. Secondly, given the pipeline of further cost-saving and despite further investments in the business and the inflationary pressures, we now expect Group total cost to reduce to around (indiscernible) our previously revised total cost estimate for 2014 so a year ahead of the revised plan.

Thirdly, we are targeting a further improvement in asset quality and impairments, following better than expected reduction in non-core assets. We are targeting core loan growth in the second half of 2013, as I said last year, driven by our proactive customer focused approach and the Funding for Lending scheme despite the subdued economic environment and expected continued deleverage in the U.K. economy. We will continue to reduce non-core at an accelerated pace and therefore expect a reduction of at least GBP20 billion in noncore assets this year. As a result of the substantial progress we are making, we are very confident in having a portfolio of less than GBP70 billion by the end of 2014, with less than GBP35 billion in noncore, nonretail assets.

Finally, given the strong progress to-date, we remain confident of delivery our medium term financial targets over time.

Thank you and we are now happy to take any questions you may have.

Transcript Call Date 03/01/2013

Tom Rayner - Exane BNP Paribas: Tom Rayner from Exane BNP Paribas. Could I have two questions, please? Just first on margin guidance, 1.98%, I mean could I encourage you to add a core margin guidance to that figure and I'd also be interested to understand a bit more about how the gilt sales at the end of 2012 is affecting both core and potentially Group margin going forward and deposit repricing as well, if you could update us on your thoughts. I have a second question on Verde, if possible, please.

Antonio Horta-Osorio - Group Chief Executive: Okay, let's start with margin and George will address that question.

George Culmer - Group Finance Director: Yes, certainly. First of all – sorry (I'm not) going to bust it into where the core margin will go and the noncore margin will go, but I think as you've seen from the trends for 2012, you can see the strength and stability of that core margin. In terms of guidance, there obviously are number of components to this, the numbers sort of pluses and minuses regards. Going through the sort of pluses first, obviously you've got things that decrease in proportion of noncore that I referred to in my presentation. You've also got the shifting of funding of the Group in terms of moving away from Wholesale to the deposit funding. So those are positives, you've also got the benefits from things like the debt buybacks, et cetera, that we took action on in the second half of last year. Going the other way though accessing some of those changes in deposits and Wholesale prices will take time. It could take time for the deposit book to churn. As I said in my presentation, we don't expect to be materially active in the Wholesale markets in 2013. But looking at the other way, there is the run-off and things like the structural hedge, which will be a slight drag. And then coming to your particular point on the gilts, yes, as I said in my presentation, as Antonio did, we were big sellers of gilts through 2012, accelerating that towards the backend as yields came down even further. So we sold out and realized that gain of GBP3.2 billion with yields the order around 160, 170 et cetera. We did that predominantly for economic reasons, we saw that there was value at that price, and I think we've been proven right in terms of what's happened to prices since. In terms of impacts of that, yeah, the NIM drag from an accounting perspective you'll get (technical difficulty) it's about 8 basis points of 2013 guidance. So if you just said on our hands, that 1.98% would probably be roundabout 2.06% et cetera we talk about. But the other big benefit it has is in terms of capital. I mean, as you know, from a capital perspective on current rules on CRD IV, you basically reflect gains as they are realized. So it's a big benefit there, but also importantly, I think on the new rules that's done on a mark-to-market basis. By locking, as I said in my presentation, by selling out in locking in, we've probably secured up to about GBP1 billion of capital that we just allowed the mark-to-market to basically grow and then contract as we moved into 2013, we would have lost from our capital position. So there was real economic benefit to do it. There was real capital benefit to do it because everything comes to the cost and the cost is sort of presentational impact that it does cost us about 8 basis points in NIM in 2013.

Tom Rayner - Exane BNP Paribas: (Indiscernible) maybe with changing rules on (LCL) you'll be able to switch into some less liquid, higher margin asset (multiple speakers)…?

George Culmer - Group Finance Director: ...continue to have flexibility. I mean to your point, we thought that we will now have that flexibility.

Mark Fisher - Director of Group Operations: I think it is important to add two things here, Tom. So we have said here quarter-after-quarter that we felt interest rates were going down. We did not think that our shareholders' money should be used in 10-year gilts sub-inflation. So as George said, as interest rates continued to decrease and reached very, very low levels in quarter four, we have accelerated debt for the reasons you heard. I think it is important to add the following. Going forward, you'll have two impacts. One is a mere accounting impact, which is these gilts were in the portfolio at much higher yields and we have switched that through a capital gain. But there is a second impact, which is given that rates were very low and we still think they are low, we are keeping our liquidity assets much shorter duration than before, and then you have obviously an opportunity cost which is the 10-year gilts are now (indiscernible) and short-term money is at 50 basis points. That is a real opportunity cost but it has the risk as well, but you have the two impacts. So that 8 basis points George is telling you that would otherwise be (negative) to the NIM guidance, so the 1.98% plus 2.06% is both part of an economic impact and an accounting impact. On the economic impact, we think we should continue to put your money at lower durations. The accounting impact is just a change between future guidance and lock-in present capital gains which are already in the capital position.

Tom Rayner - Exane BNP Paribas: Just on the IPO, on the Verde, if IPO was to become an option, I just like to get a sense of what if any incremental costs there might be going down that would then continuing on the (regular income)?

Mark Fisher - Director of Group Operations: Right, well, as we said here before, we are absolutely committed to our Plan A, which is to sign the SPA after the MOU signed with the (Corp) last year and we have said before that we are expecting to sign that SPA by the end of quarter one as we are in March 1. So at the same time as we said that we also said that we thought the right thing to do was to prepare this bank, prepare this deal to be then as a full-fledged bank, we were building the bank and you are going to see the TSB Bank in the summer in August in the high street competing with the other brands. So either we proceed with our Plan A, which we are absolutely committed to doing, either we can divert to Plan B which is a IPO as it has always been but as to now the past is the same, because we are building the Bank, we are now putting the customers across from older bank, the branches of Lloyds in Scotland and Wales into Lloyds TSB Scotland. Lloyds TSB Scotland is what is the Verde project and will become the TSB Bank and will be there by the summer. So if you ask the Cooperative Group, which you should probably ask that question as we have asked, they say they are completely committed to completing this deal and we are trying to help them as much as possible in order to do it and that's where we are focused on.

Tom Rayner - Exane BNP Paribas: The incremental cost might not be material, is that fair?

Mark Fisher - Director of Group Operations: It is fair to say that we are at end of Plan A and so far we are not focused in this stage about Plan B, but both are following the same path so they don't change from alternative to alternative at this stage.

Raul Sinha - JPMorgan: It's Raul Sinha, JPMorgan. I have two questions please, firstly thanks so much for the disclosure on PPI and the claim rates. It looks like the claim rate that is currently being seen across the market is quite low and if I compare that to the relative provision that you have remaining on the balance sheet, I think you say GBP150 million a months for the first half of the year, you would need a significant pick-up in the rate of claims to take another PPI provision. Is that a correct way of thinking about it?

George Culmer - Group Finance Director: We said in Q3 that come to year end, we would have more information that we haven't. That's part of just the passage of time, but part of that gives us a full seasonality. We've got a full month actually of sort of PPI at sort of full throttle coming through. What we've done as you see we sort of at the end of the year a neutralize provision of 0.9, as we said we've added 1.5 to that, so that gives us a neutralize provision of 2.4. What we've done reflects a bit of what we see in terms of uphold rates, costs etcetera, but we will still take a revise view of the ultimately likely cost. Yes the chart that we've shown – show you how complaints are coming down and consequently costs are coming down and you can see those sort of 20% fall Q4 on Q3 etcetera. On the average spend and average monthly run rate, I think we said we expect it to be round about GBP200 million for Q4 per month and December was about GBP150 million. There is a December effect in that and so if you normalize that, you will up about sort of GBP160 million et cetera. Given the trajectory I think I have also said in the presentation, I expect that GBP160 million to stay at about that level because we view some sort of past business reviews of the first half of 2013 and then to fall away after that. Now that's based on our expectations., that's based on outlook and if you do the match you see that we have significant monthly coverage. Now, uncertainties do remain, I should say that, but what we've tried to do is put a provision that provides for a significant number of month (technical difficulty) claims.

Raul Sinha - JPMorgan: Second question was on capital employed. Antonio, I think it was a positive surprise to see the fully loaded Basel III number up to 8.1%. Especially given, if you note that one of your peers, which operates, I would say, somewhat more riskier business model has just raised a dividend with a similar Core Tier 1 ratio recently on a fully loaded basis, would it be right to think that, if pretty much that shrinking statutory loss that remains between you and your dividend. I didn't – (indiscernible) come with the last part of that question, but is it just a statutory loss that remains between you declaring or restarting a dividend now?

Antonio Horta-Osorio - Group Chief Executive: The key bit of the question, what was that? Look, I got the pension message. This was not agreed with Basel, but I have – this is the third results presentation where I have to tell you the same thing. I – we have a highly capital regenerative model, as you know, because we have decided as you to, given the difficult economic environment, lower interest rates, we have decided to focus the Bank creating a competitive advantage in costs and in lower risk. Therefore the consequence, all the nominal cost decreases we are achieving and the significantly lower impairments not only from the core bank, but especially from the reduction of non-core assets, because as we sell there is no more impairments going forward. All that flow directly through the bottom-line as you are saying, so we are generating as much capital as possible. Going into that direction we believe of Basel, without knowing exactly what the intensity is, right, and given that lending in the U.K. is not growing, we are not using capital to support lending because in net-net terms, the economy is not growing in terms of lending. So everything in our strategy is capital generative. So what is going to happen now? Finally, I think after this bonus cap approval, the CRD IV paper is going to come up and thus the CRD IV paper is going to come out. We have been going to the right direction, I think are going to see the specificities of the paper. What's going to happen mainly with the insurance deduction where we are being very conservative, because we are receiving Article 45 and not 46 and as we see the paper, as I said right now for the third time, I will be able to discuss with FSA (indiscernible) what is our capital plan, what is the strategy that FSA wants us to do and that (indiscernible) what is our past two dividend policy which I will come back and tell you. So I think this is probably last time I'm giving you this (answer), but in any way we are working more than we thought, so – as you said, quicker than we thought towards debt capital ratio that we thought we will be at the end of 2014.

Chris Manners - Morgan Stanley: Chris manners from Morgan Stanley. Just three questions, if I may. So I was looking at Page 130 at the fully loaded Basel III leverage ratio, 3.1% and I thought given Garnier's comments, the Treasury Select Committee about leverage ratios as well very being higher from his thinking, as well as risk-based capital measures and Parliamentary Commission on Banking Standards suggesting that – because 4% leverage ratio to be implemented. What sort of leverage ratio would you like to be (technical difficulty) on that consisted base? I know you gave your Core Tier 1, you want to be above 10, do you have a leverage ratio in mind?

Mark Fisher - Director of Group Operations: We feel very comfortable with whatever of the ratios is approved. In our ratio that you see in that page as you just mentioned is not comparable with what other banks presented, not presented on a same basis. We are very comfortable either with three or four and what I think so from an industry point of view that you have to be careful going to three instead of four, because if you go to three instead of four, they are two important mainly mortgage banks in the U.K. that would have a restriction. But for us given that we are much broader Commercial and Retail Bank, either three or four would not be relevant in our case.

Chris Manners - Morgan Stanley: I had a question on loan growth, obviously you're talking about loan growth in second half for the year and just trying to work out where specifically in core that would be and also you've got 120% LDR in core, are you comfortable with that, or would you still…

Mark Fisher - Director of Group Operations: We have what? Sorry, we have what?

Chris Manners - Morgan Stanley: Loan-to-deposit ratio in Retail core of 120%, is that something you're going to continue to run down or you're happy with that?

Mark Fisher - Director of Group Operations: Right, well we consider the loan to deposit ratio on a Group basis and because I think that's a right thing to do, given that for example Wealth which is highly deposit generic is not included in Retail. So to look at it in Retail alone, I don't think is a right thing to do. We also have an online deposit business outside of Retail. So I think you have to look at it as a whole. As we said in the strategic review, I thought that's the time and remember this bank came from a loan to deposit ratio of 169% just to put it into perspective. They are achieving by '14, less than a 120% in the core would be a good achievement. We are now at the 101% in the core. We are at the 121% in the total Group. I think this is correct because as we continue to share the noncore assets, the Group loan-to-deposit ratio will trend to the core as we will become close to 100%. So you can expect us continue to increase deposits. Although at a lower pace we will probably increase deposits more in line with the market, because we have already two years ahead of target to reach our target for '14 and also our long-term target for the Core. What will happen in terms of lending, and my comments in terms of lending, as I said in the presentation, you have to take them in the context that I believe business lending to U.K. nonfinancial corporations will continue to be negative in 2013. So as I told you at the Q3 results, I continue to expect SME lending in our case to be positive. It is has been positive now two years 7% against an 8% following the market. We will continue go at around 4%. Our pipeline absolutely sustains it and I am very comfortable about it. Second segment, Mid Corps, that is one of the reasons why we have now put Mid Corps together with SMEs because we want to put the across the best practice of SMEs into the Mid Corporate space and have it growing. I think, as I said in November, that the Mid Corporate segment and the Large Corporate segments will both turn positives in terms of net lending in H1. Then finish the color on the total loop. As you know, we wanted to achieve an around 25% market share in mortgages in line with our branch market share post Verde and also to get the core at the 100%. I thought as I told you in November we would reach it around quarter two and therefore our mortgage growth in net terms will start growing with the market after quarter two as the market in the U.K. is growing 1% and I think it will continue to grow 1% in that terms. You can expect our mortgages from the third quarter onwards to increase 1%. Therefore, all of our core lending as a whole in each of the segment is going to be positive net lending growth from quarter three onwards, that's quite precise, in spite of a falling market and I see that some research reports still don't believe that we will be here.

Manus Costello - Autonomous: It's Manus Costello from Autonomous. I just wondered if you could give us some more color on your decision to issue equity to pay the coupons on the Tier 1 loans, because it seems little bit surprise, given the confidence you are talking about in your capital generation and the fact that you are calling a lower to Tier bond the other day, that seems somewhat contradictory actions, and just as a follow-up on that, I wondered if you could give us an update on what your plans are for the stake and (indiscernible)?

George Culmer - Group Finance Director: I'll do the first one and I'm quite happy to reiterate our confidence in our capital position and how that capital is developing and how that capital position will move as we move forward, but in terms of those particular instruments what we're doing is to plan a policy that is entirely consistent with last year and to upsell.

Antonio Horta-Osorio - Group Chief Executive: Relating to (indiscernible) which I'm going to reiterate, I find it's a great company. It's doing very well. I think it will probably be a winner out of RDR. Prices are increasing in the market in line with good performance as they delivered yesterday and we are very happy with the way the share price is going.

Manus Costello - Autonomous: So just to follow-up on the statement, George, except that these is the same policy you adopted last year, but in the numbers you are showing that your capital position is materially stronger this year and your outlook on capital is more optimistic. So, why do you adopt the same position? Is it your decision or is it a regulatory decision? Is it your decision or is that regulatory decision?

George Culmer - Group Finance Director: Well, thank you for those comments on our capital position. It is not material and we are just being consistent with last year.

Ian Gordon - Investec: It's Ian Gordon from Investec. I just have one request and two questions. The request is in order to just to follow your progress against the core balance sheet footings guidance, (Juan) could we have some divisional disclosure at the quarterly statement please? Then the two questions are, first of all, on other income. Could you just provide us a little bit more color on the expected weak performance in Retail other income and the encouraging performance in Corporate other income? Then thirdly, I am not asking for quantification, but would you be prepared to hazard a guess as to whether the reports of an end of summer times go for your LIBOR settlement with at least the U.K. and U.S. operators is ballpark correct?

Antonio Horta-Osorio - Group Chief Executive: Can you repeat your last bit of the question? I think you asked three questions, but the third one wasn't…

Ian Gordon - Investec: I was just asking if you were to hazard a guess whether the reports of a end of summer settlement for your LIBOR settlement with U.K. and U.S. operators is likely to be ballpark correct. I am not asking of quantification, just a guess in terms of times going out.

George Culmer - Group Finance Director: LIBOR, as we said, you will see from our disclosures that our position is fundamentally unchanged. We are not being focus of the authorities bid, in London bid, in Europe bid, in New York and that's not something that we passively sit back and wait and we are very proactive. So we are not focus of their attentions. There may be others who are better informed in terms of likely settlements or whatever, but we are not the party to be speaking to. To your first question, your request on the reporting bit, I'll take that on board. We are trying to simplify and shorten our reporting which might fly slightly in face of your request, but I'll take it onboard.

Antonio Horta-Osorio - Group Chief Executive: I'll answer to your second bit, which is, I think, the way I look at the divisional performance is, Retail had very good performance this year, where impairments and costs more than offsets a slight decrease in income which is basically originated by interest rate movements during the year and also a decrease in volumes as we have just discussed and the OI in Retail, specifically you have to see it in a context where the markets has not been good, so you have less investment sales. In terms of bank assurance, they also now might go down when the economic situations are more difficult. So I would see it just basically in the context of the year. I think Retail has been a very good performance and have set up the bases to have a much and even better year in '13. You have to see that we have a very powerful retail franchise with three leading brands really complementary between themselves, so with clear multi-brand approach to our customers with segmentation, where I strongly believe that the additional costs of serving customers in a multi-brand approach much more than compensated by the higher volume that we give to the different needs of the different customers in the different brands. As you can see the Halifax brands for example has a very different strategy to Lloyds and that is also in line with the culture and the DNA of its customers' brands. In Commercial, which is in a different stage of development and you will hear more about this in the Investor Day, with Andrew who is just sitting in front of you. Commercial have to set the bases to start growing in a proper way in terms of mid corporates and large corporates and get a higher shuttle of wallet in the process where by the way as you know is where we are investing more of our capital in terms of growth initiatives on the commercial area, so we are – we have had very good results with the money market and the FX portal arena where we triple our customer base, (yet uses it). We are substantially enhancing our Transaction Banking capabilities which are weak and we have to develop them further. We are the main bank to 20% of the U.K. mid-corps and large corporate but we have the Transaction Banking capabilities. We are investing heavily on those and therefore, you should no doubt in the future see the commercial area increase their profitability, as I said before, through an increase in revenues, especially OOI and a decrease in RWAs and therefore capital allocated to the division.

Michael Helsby - Bank of America Merrill Lynch: It's Michael Helsby from Merrill Lynch. I've got two questions and if I can offer a question (indiscernible). Could you give us an average balance sheet that gives me the yield on your assets and your liabilities? There is a lot questions about margins, I think that would be really, really helpful. So just on the margin, that's the first question. I think you've helpfully gave us the 8 basis points impact from the hedge, so – and we've got 13 basis point underlying increase for want of a better word, could you give us – you've also identified quite a lot of changes, but could you help us by breaking down that 13 bps into how you see it from assets spread, deposit spread, you mentioned the Wholesale funding buybacks and also the negative impact of the hedge. The reason I ask is, clearly, there has been a lot of movement within deposit pricing recently, so I'd just like to get a gauge of what you're factoring in. That would be really, really helpful. The second question, which I can go now is just on costs. I was wondering if you could give us a split of where the rest of your simplification costs are going to fall. Is that all in core? Or does an element of that go into noncore? If you can give us a gauge of how you see the noncore cost base in 2014?

Antonio Horta-Osorio - Group Chief Executive: I'll start with the costs because that's easier a bit then I'll leave the difficult one for George on the margin split. Look on costs, I think what I saw this morning very quickly on the note, I think it's a bit equivocative, because what we basically did on costs is every simple, we brought the guidance of '14 a year earlier into '13. So I saw some people saying, this is higher than consensus and therefore it's not as good. I don't think you should read it that way, because we have not finished the year yet. What we did is basically bring the guidance of '14, that's have in turn have been brought to (9.8), we now brought it to (13), which shows that we are very confident that we continue to go ahead of plan. As you see on the rest of the numbers, right, so that's the broad picture and in terms of the split between core and noncore as we said before in this presentations, we tried to allocate only variable costs to the noncore, because noncore will disappear. So most of the cost in noncore are variable and you should expect them to disappear over time, not totally because they cannot all be variable. For example, if you are in new region, there are costs in that region that only disappear when you exit the region, but they will be reasonably variable. So you should expect the cost in noncore to go down and the noncore assets go down as well. We feel very comfortable – as Mark said that we are only half way in terms of our simplification benefits and I would like Mark to give some color. But before I do that I want to make an additional point which I think you should really think about. It is very easy to cut costs. Very easy. I mean I have done it all my life, very easy to cut costs. What is really difficult to do is to cut the (technical difficulty) costs between costs and revenues and without impact on quality and that's why we showed you that as we have cut nominal costs now for two years in a row and contrary to the general wisdom, our NPS (cost) are all going out. Lloyds is now independent assessment, the best brand in customer service in the High Street and our compliance have more than halved in two years and are now per customer – the compliance per customer are now less than a third of our three main competitors. So I think this all combined shows how industrialized process we have and how we are doing this in the terms of cutting on no costs, but as I always said from the customers' point of view and therefore are simplifying the customers' experience and therefore having their feedback as higher quality and less compliance and this is really the difficult thing to do. Mark, can you give some color on this please?

Mark Fisher - Director of Group Operations: It is a very easy job I have to do of reducing costs. It's really – if we think of it as a portfolio that I talked about the relationships with suppliers and sourcing, those things we get along with very quickly at the start of the program, because you can't do them quickly. Things like the reshaping the organization through expands and (lays). So there are the early deliverables that have given a lot of the progress that you see to-date. Meanwhile, we are working very hard actually doing the heavy lifting of reengineering customer processes, claims handling, those things which take time that big builds, typically lot of IT, they typically take 12 to 18 months to do. So clearly, you saw only now that those things are starting to mature and flow through. So the latter part of the program has much more coming to a very heavy lifting reengineering point. Having said that, the supplier side is going so well, we've actually got more to go there as well so that's why we are confident that the second half of the program as it were can't hit the targets that have set.

George Culmer - Group Finance Director: Your question on margins and firstly, your request for average balance sheet and so I'm starting the list obviously the disclosure things, but on the NIM projections, I'm not going to give you a detailed breakdown of where I see assets and where I see deposit price, because obviously as you said that deposit prices are coming off, but it's not just a question of new pricing, it's obviously the interaction between maturing deposits and the new prices and we are obviously now seeing significant movements on the asset side of the balance sheet as well. So I don't frustrate you entirely, the number I will give you there is in terms of the structural hedge, we would expect that to have a headwind of about six basis points in 2013.

Michael Helsby - Bank of America Merrill Lynch: Can I just come back on the cost, because I'm not doubting for one second that you can quote cost, I'm just asking maybe I'm misunderstanding, but you've identified the simplification cost that you've got left, so I'm just trying to ask is that all, but sounds like it's all in the call that's all going to come off core cost base?

Antonio Horta-Osorio - Group Chief Executive: No. That's a good question. No the simplification was the main program that we have designed. We are going ahead of our simplification target as you heard, but at the same time we are doing a systematic benchmarking of all the bank versus the best area in the world in that specific area. So we have a best program ongoing on top of simplification which is to compare productivity metrics organizations (technical difficulty) as we are comparing ourselves with the best in each of the areas and we are continuously reassessing how we benchmark and we want to be either the best in that area in the field or not to be in that field at all. So that is on top of what we are currently doing and that is a process we started in the second half of last year and that will have more room to go.

Michael Helsby - Bank of America Merrill Lynch: I am trying to gauge the non-core because you've got your plan, so you've got your vision of where noncore assets are going to be, so I am just trying to gauge what the cost base is. It's clear that noncore is going to get socked back into the Bank and I am just trying to gauge…

Antonio Horta-Osorio - Group Chief Executive: I cannot tell you everything, Michael. As you say the retail assets will come back to the core, so you can make an assumption of how much of the costs are under retail assets, they will come back to the core. These assets will go to zero in time, right, so less than 35 by '14 and then to zero in tome and those are the assumptions you should make and you should see that they are as variable as possible with the caveat, I told you about when there is a region, it's not too variable.

Rohith Chandra Rajan - Barclays: Rohith Chandra Rajan with Barclays. A couple on your impairment guidance if I could please, just in terms of this significant reduction that you anticipate for 2013, I wondered if you could comment how consistent that is with I think consensus fit and payments to full closer to 20% and whether that's primarily driven by noncore.

Antonio Horta-Osorio - Group Chief Executive: Are you speaking about the consensus for impairments?

Rohith Chandra Rajan - Barclays: Yes, so consensus or impairment is down 20% in 2013, is that consistent with your guidance?

Antonio Horta-Osorio - Group Chief Executive: We cannot give you all the variables, we can only give you the volumes in managing the costs. We are not going to give you impairments, but I think we will be out looking at the consensus number, I think the way to think about the impairments is, our core business will continue to perform at approximately the same level and the noncore reductions will imply an additional significant decrease in impairments, as it happened last year. So I think the way – given we have been sharing with across the board, I think you should split core and noncore. Core is very close to its average long-term AQR. The noncore is going down at an accelerated pace and impairments of noncore will go down with it, that's the way I would look at it. If you want to add anything George, that's the way to think about it.

George Culmer - Group Finance Director: I think that's the best way to look at it.

Rohith Chandra Rajan - Barclays: Just a follow-up to that is, to what degree your guidance reflects and what the FSA has been doing on asset valuation?

George Culmer - Group Finance Director: Sorry I didn't hear you very well.

Rohith Chandra Rajan - Barclays: So the question is, to what degree your expectation on impairments reflects the work the FSA has been doing on asset valuation?

George Culmer - Group Finance Director: That's a very good question, one of my favorite. I think the best confirmation that we have a good and appropriate and prudent provisioning policy and the proper marks, is the speed at which we sell noncore in a capital accretive matter. We told you last year we would sell GBP25 billion and we have increased that to GBP30 billion. When we go to GBP31 billion we said GBP38 billion and we finished at GBP42 billion, so we sold GBP42 billion (technical difficulty) capital accretive matter, generating GBP1.2 billion in the process which is interesting in an FBC context, because we are generating capital as we sell the noncore assets. When you look at it, you can see that the 42 in percentage terms are bigger – larger than the previous year as you saw in the presentation. So we have increased the acceleration. We have increased the rate of decrease of noncore and when you look at risk-weighted assets, you see that assets, the 42% decreased 30%, the RWA decrease 33%, so risk decreased even more than the assets and the 33% decrease in RWAs, which is GBP36 billion is larger in absolute terms than the RWAs of the previous year reduction which was 35%. I think that tells everything about our marginal capacity to sell noncore assets in a capital accretive way. With this we come to the front of the room again.

Peter Toeman - HSBC: It's Peter Toeman from HSBC. On a similar point, the FBC has been concerned about inappropriate risk weightings of banks and obviously a lot of commentary about your 16% risk weighting on the mortgage books. Obviously, you're not expecting any pushback from Andrew Bailey when you have your discussion.

Antonio Horta-Osorio - Group Chief Executive: Look as George and myself, we be both said, and George may give some color on that. We are very comfortable with our capital position and you can see the capacity of generating capital when quarter after quarter both our Core Tier 1 ratio on normal basis, on a fully loaded basis increased by 25 basis point a quarter on average in spite of legacy provisions which will be substantially lower going forward. So, we have an enormous capacity of generating capital. The (mark) I just answered, (conduct) we have answered before, and in terms of the risk-weighted assets and those models, they have been agreed with our regulator. We think we are reasonably in the middle of the pack and we are very comfortable as a whole. I think the main points in the U.K. last year was actually the shift in focus from a pure financial stability view into a balanced view between financial stability and growth and support to the economy when you saw in December substantial changes in the liquidity rules and the implementation of the Funding for Lending Scheme, I think those are the facts as I said in our Q3 IMS and in our conference call that changes balance that shows a much more balanced approach towards a holistic solution of the problem, which I think is the right one and I do not think you are going to see significant changes to that approach.

Chintan Joshi - Nomura: Chintan Joshi, Nomura. Can I ask you on core loan growth from second half? In case U.K. GDP doesn't grow, would you still expect to grow core lending?

Antonio Horta-Osorio - Group Chief Executive: I haven't thought talked about that. We expect U.K. GDP growth of around 1%. So we expect such trends slight improvements and we think the Funding for Lending scheme will help if GDP disappoints and stays like last year on zero. I still think we will grow, because what we are (technical difficulty) is not GDP driven what we are doing is internal part driven. So minor changes of GDP will not change our actions, we may have to make bigger efforts or slower efforts, but I expect to grow our core lending in a fully lending markets, small changes of GDP will not change that, they will change the intensity of our actions.

Chintan Joshi - Nomura: So then if I take that forward, you've given some disclosure in the appendix regarding your share of remortgage which is one area where it's below the market levels. Is that an area that you would look to pick up your market share in and therefore might need to be more competitive?

Antonio Horta-Osorio - Group Chief Executive: No, as I said before in mortgages, we only – our objective is to grow with the markets from second quarter onwards because of the reasons of core loan to deposits ratio of 25% market share, and we are going to continue to be focused on first-time buyers because we think that is the really important part to support the U.K. economy. So that is our focus. The rest we will grow in the markets. Where we are going to significantly outpace the market is on the business lending, keeping SMEs for the third year in a row positive in the falling markets and turning around the Mid-Corporate and the Large Corporate into positive in the falling markets, within prudent risk criteria.

Chintan Joshi - Nomura: George, if I could just follow-up on (Michael's) question, I understand it is very tricky to give this margin moving guidance, but broadly speaking deposits are improving, Wholesale funding is improving. So in that mix it is asset pricing that's probably giving you some bad so that net-net you are at 1.98%, is that fair?

George Culmer - Group Finance Director: That's not bad assessment. There are other headwinds going on as well, other sort of factors, but that's certainly not bad summary.

Sandy Chen - Cenkos Securities: It's Sandy Chen from Cenkos Securities. Just, well, two questions. One on mortgage arrears and just a read across. I am looking at Page – Slide 19, it looks like the mortgage arrears have been relatively flat for quite a while. I am trying to put that together with the properties and repossession, which has come down and also the guidance on mortgage forbearance, which has also come down. Putting all those things together, does that imply a lot of restructuring of loans into interest-only that are not included in the loan forbearance numbers or have I misread that?

Juan Colombas - CRO: In forbearance, we include the restructure in interest-only mortgage. The (important thing) forbearance, as you are saying is the trend and the trend is sort of decreasing. So they have nothing really being cumulated behind the numbers that we have in the rate. So our views on the mortgage portfolio is a flattish trend and they will noted in the noncore book, because as we have said, it is a time for this book to season and it is seasoning, because it just doesn't see the decrease in the areas of our closed book mortgage is good news. So I think what you could expect in the mortgage market is a kind of flattish trend for the '13.

Sandy Chen - Cenkos Securities: The other question that I had was on the Core Tier 1 ratio. The 8.1% I think that you've given, that include the pension IAS 19 pension corridor adjustment, the GBP2.1 billion and what would your estimate be of how much fully loaded would come down?

Mark Fisher - Director of Group Operations: No, as I said in my presentation that becomes effective from the January 1. One of the things I think it will bring is a bit a intra-period volatility, what I would say is though that, stepping back, I generally expect our Core Tier 1 on the current rules and the fully loads will continue to increase because of the core earnings and the continued accretive non-core reduction. The IAS 19 will bring some volatility. It's not the full GBP2.1 million in terms of impact, because what happens at the moment is we will move from – we got an asset we recognized on the balance sheet and we'll move to a deficit, but for capital ratio purposes you can't count the assets. So actually it's not the full movement. So we estimate actually the impact on current rules would be around – it came in about 40 basis points, it's probably now down to about 30 basis points in terms of the impact. It will be quite volatile. One of the things that we're doing internally is working with the pension schemes trustees just to see where we can actually reduce that volatility, but it would be about 30 basis points on current rules.

Claire Cain - Royal Bank of Canada: It's Claire Cain from Royal Bank of Canada. I have a question on your – best way to really look at liquidity from your perspective, you've given us some ratios on Slide 21 and your liquidity portfolio is pretty much flat year-on-year but relative to you wholesale funding, it's really increased. I was wondering if you could confirm whether you are compliant with the LCR, or is there something you are working towards, and then how we should think about the liquidity portfolio in absolute terms coming down over the course of 2013. Then my second question I was wondering if you could give us some more details on your comments when you'll plans to optimize the capital structure this year?

George Culmer - Group Finance Director: I won't give any specific on the second point. Obviously, we've got rule changes coming up and we will continue to scrutinize our balance sheet and plan and to see what is the most appropriate structure for go forward, so it's very obvious for commercial reasons I am not going to tell you what we might do, but what we are doing is generally looking at the balance sheet. As I said in my presentation there is no need for any material wholesale funding, but we'd probably be look at tactical opportunities as we will continue to scrutinize our balance sheet and see what we can do to make us as efficient as possible in the regulatory world to come. In terms of the first question, liquidity, yes, we don't disclose in terms of compliance with liquidity requirements be it IOG and LCR and obviously there has been the recent rule changes in LCRs. We feel very comfortable in terms of our liquidity position and in terms of compliance with the regulatory requirements and we will always be looking to deploy that liquidity we've got as profitably as possible and look to – as we look into put it to use, but what I can tell you is in terms of regulatory compliance, we are very comfortable with both ILG and LCR compliance.

Antonio Horta-Osorio - Group Chief Executive: I think you should look at how we're creating the context as I also said in my speech of the journey, because 18 months ago this bank had GBP300 billion of Wholesale funding, half of it, the GBP150 billion short-term Wholesale funding (technical difficulty) portfolio and now of the GBP150 billion, we only have GBP50 billion. So we have repaid the GBP100 billion of short-term Wholesale funding and the GBP126 billion of Wholesale funding together which completely changed the funding and liquidity position of this bank. Of course, it's a big cost, because short-term funding cost to your LIBOR and Wholesale funding or deposits, probably cost you 2% of the LIBOR. So that that implies as you can imagine, that implies like more than half, GBP100 billion of less income that I would argue it is income that should never have been there in the first place. Second, it is complete and therefore, given it is complete, you will no longer see this impact going forward. More questions? Please in the back.

Unidentified Analyst - Redburn: (Indiscernible) speaking from Redburn. I noticed that – I think by week ago now there was sale of some noncore assets, Countrywide assets to you and (indiscernible). In the sale of the assets, you provided some debt financing to Countrywide. My understanding was vendor financing isn't done in the noncore business. I just wanted to get an idea, did that deficits remain in noncore or does that gets transferred to the core business?

George Culmer - Group Finance Director: No, I will not comment on this specific transaction, but I can tell you the way we are managing the noncore disposals, so the stapled finance that we are doing to noncore deposits is minimal is we – our policy has been not to do it. I have to tell you, it is not an exclusion. So, in the cases we think it is appropriate, we do it. But our policy has been to do the noncore reduction without any gain or (indiscernible) finance.

Unidentified Analyst - Redburn: Does that client then stay in noncore or is that transferred to core?

George Culmer - Group Finance Director: It depends on the transaction. It is a minimal type of thing. It's very, very small.

Unidentified Analyst - Redburn: Just one more question on margin and obviously you talked about 8 bps headwind, but how much unrealized gains are left in the gilt portfolio? Are you going to continue to sell them and what kind of headwind does that have on margin?

Antonio Horta-Osorio - Group Chief Executive: Well, we feel – so as of December 31, we had done, as George said, most of it, but we still had some and we have continued to sell them. So I cannot tell much more but we have continued to sell them, although now we stopped because now interest rates are above (2). But we have continued to sell them through January, yes. Although most of it has been done, so the GBP3.2 billion you saw was most of it...

Unidentified Analyst - Redburn: Not much of that...

Antonio Horta-Osorio - Group Chief Executive: …to try to put in to perspective. So we had some left, we have done part of the some left. We still have a bit of the some left. But again, the point is very clear. I think you should take – we thought for a long time and that's why we acted according to what we thought, that we should not have shareholder's money in 10-year gilts sub-inflation. That was a basic thing. So, as rates went down, we sold more and more. As rates started to come up, we sold less and less, but fortunately we have most finished. Michael, again.

Michael Helsby - Bank of America Merrill Lynch: Michael Helsby, Merrill Lynch. Just two points of detail actually. You mentioned in your comments before about how your CRD IV deduction is still on Article 45 not 46. Can you just remind us again what the benefit of moving from one to the other would be?

George Culmer - Group Finance Director: It would be at least 12%.

Unidentified Analyst - Redburn: Just on your DTA deduction is that all that on U.K. business. I saw U.K. corporation tax should be…

George Culmer - Group Finance Director: I think it's totally very vast majority of that yeah. Because we got very little international presence and most of it is, okay. More questions?

Manus Costello - Autonomous: Manus again, what have you found this time?

Mark Fisher - Director of Group Operations: Just at least what I've not found actually it is the great follow-up, the fair value unwind, we don't have any guidance on it for '13, '14, '15 and in fact now moving below the lines, I wonder if you could give us some idea what the impact will be for the next year. If I take a take look at fair value and we used to give guidance on it and then be wrong over time. So it's something that -- and I think for 2013 it should be moved into negative and I think it will be about 0.3 or something a 0.3 negative of that order, but. Okay any more questions?

Antonio Horta-Osorio - Group Chief Executive: So we are done. Again, thank you very much for coming and we'll speak to you (indiscernible). Thank you.