Lloyds Banking Group Bank of America 31st Annual Financials CEO Conference

Thanks for having me again.

Good. First of all, thank you for having me, and it's great to be here with everyone. We were just commenting before I started, this time of year seems to be the moment when we're waiting for a new budget. It's my fifth prime minister in 5 years, my sixth Chancellor, and my seventh economic secretary, so it does feel like a good time of year to have this discussion. Look, the underlying economy, despite those last 5 years, when I look at the underlying economy and when we look at the kind of 25% share of the whole of the economy that we can see running through Lloyds Banking Group, the story remains incredibly similar. We see households and businesses are very resilient. They've had now 3 or 4 years of real wage growth.

Businesses, probably for not such good reasons, have strong or stable cash flows. The not such good reasons is they have slowed down investment, but their resilience is very, very strong. As we have talked about it, our outlook for the economy has been consistent now for a few years, which is what we call a resilient but slower growth economy. There is the potential to move to a higher growth trajectory if you could reestablish confidence and if we had a policy framework that was encouraging investment. At this moment, over the summer, we have seen both investor and business confidence slightly strengthen, and we are seeing very resilient underlying performance and behaviors.

By the way, discretionary spending, big-ticket items, the mortgage market, which I am sure we will talk about, remains very resilient, but our outlook for the economy is a 1%-2% real GDP growth over the next few years. So some recovery, some increase in investment, very resilient, but our baseline isn't for a faster-growing economy. I am sure we will talk about the strategy, but despite that, we still see significant growth opportunities for Lloyds Banking Group.

Great. Well, if my CFO were here, he would warn me about guiding to different guidance. So I am not going to take that opportunity. First of all, let me tell you what we are excited by. Obviously, the first thing is we have kind of completed our first chapter, which was the first four and a half, five years. The key themes there were de-risking and solving the legacy, getting the group back to growth and winning market share in strategic areas, and materially lifting through cost efficiency and that revenue growth, the capital generation and sustainability of that capital generation for our shareholders. That is really important because it gives us momentum and the capacity to continue to invest as we look forward.

When we look at what we are excited by going forward, the first thing is we have proven that we can grow our market share in the really big businesses despite a very competitive market, but that is an ever-rising bar. We are going to continue to invest and make sure we are the leader in all of the big retail and SME segments, and in the key businesses that we have chosen we want to be in. That is the first and most important objective or big objective of the strategy. The second thing is we have this unique franchise or set of businesses where although we are the leader across most U.K. businesses in commercial and retail banking and in parts of wealth and other businesses we will talk about, what we really focus on is being more joined up, more connected, and having a differentiated proposition.

We have shown a significant growth in specific businesses in the last five years. When we look to the next five years, there is a massive opportunity for us to use our capabilities, the new technologies to join up even better for our customers and drive that deepening of our relationships with our customers. The third thing is we have talked about and we are committed to some new businesses, some new areas where we see strategic potential and future growth. In the last phase, for example, we launched a new rental property business that got to about 10,000 properties, a very significant part of our OOI growth or a material part of it. We see other new businesses, specifically what we call Connected Commerce, which is using data to join up between our SME customers and our retail customers.

Some of the payments and wallets businesses we are launching, which we think is exciting, digital assets. Then how we can use agentic AI to bring intelligence or advice to all of our SME and retail customers, which we just see as a huge opportunity looking forward. Now, you said conservatism, so I am not going to avoid that. What you will see from us always is we will be ambitious on the things we can control, and we will be realistic, I think, about the things that we cannot control. There are two or three parts to that in the plan. We have talked about in this next phase, mid-single revenue growth for the next four years. That would be a decade of mid-single revenue growth we would have delivered and high single-digit other operating income growth. We have just come off five years of 8% CAGR on other operating growth.

Those two things are ambitious. We have had questions, though, as to why our NII is not higher in that. That is linked to two things really. The first is, we have just assumed that our terminal rate that we think is in our forecast, which is 3.5%, will be the baseline for our reinvestment of the structural hedge. That means it is a weighted reinvestment return of about 3.7%. If you use today's market curves, you would get a much higher number on the structural hedge, about GBP 250 billion worth of deposits being reinvested at that level. The second thing is we have seen elevated competition in deposits and assets, liability pricing in the last period of time. We have assumed the market remains rational but stays stable, and that those margins remain tight through the back end of this period.

I think those two things, if you want to take a different view on those, that could give you more upside in the plan. Then maybe the final thing we cannot control is the pace of adoption of AI, either by our customers or our regulators. We, for example, have committed to a less than 45% cost-income ratio by 2030. If AI gets adopted more quickly, the regulators really support it. We are right at the front of all of the use cases that are being adopted in the U.K., so we will push that faster. We are comfortable we can deliver the guidance, which shows a very significant step up in capital generation and sustainability of it. There is some upside for those that want to make those assumptions.