Lloyds Banking Group Earnings Call Nuggets: Deposit Growth and Outlook

On Thursday, Lloyds Banking Group (NYSE:LYG) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Deposit Growth

Tom Rayner – Exane BNP Paribas: Just like to ask a question on deposit growth, because obviously it’s still continuing at quite a decent pace and you’re going to be getting pretty close to your sort of target levels in terms of loan-to-deposit ratio both at core and for the Group. I’m just wondering what we should really expect to see once you have reached those metrics. I mean are we going to see deposit growth slow, might we see loan growth pick up or will we see possibly the loan-to-deposit ratio dropping below 100% in core or maybe below 120 in Group. The reason I’m really asking is I’m trying to get a sense of what the margin implications might be of those different potential outcomes?

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Antonio Horta-Osorio – Group Chief Executive: This is a very valid question which we have waited long enough as we now doing our budgets for next year and reviewing our career plan. So what we think we’ll do is the following. We want, as usually, to meet what we have said we would and therefore, you can expect similar behavior in terms of us achieving the target of 100% by March, which will be at the same time, as I said, 120% at the Group level and from then onwards once the targets are achieved, as you were asking, we think we will probably grow savings at the lower rate in line with the markets, because as you say we don’t need the money, we are generating more than GBP20 billion of extra liquidity every quarter, year-to-date more than GBP60 billion. We do believe that by then also assuming as you ask that our core loan book should start to increase by the middle of next year, as I said at last results presentation, we should increase our deposits as a whole at around the market level, so slow it down to market level given all this economic assumptions.

Tom Rayner – Exane BNP Paribas: The sort of margin implications possibly of being able to slow that growth in deposits?

Antonio Horta-Osorio – Group Chief Executive: Well, you have seen recently as a result, I believe, of the liquidity rules that have been changed in July and also I think from the expectations of the Funding for Lending Scheme and I say expectations because as you know the drawings from the Funding for Lending Scheme have been very small up-to-date just because as normal it takes three months between a loan being improved and the actual disbursement of the loans. So, I think the FLS impact in the market at the moment is just the matter of expectations. The real impact has been in my opinion from the significant change in the liquidity rules, which we have mentioned several times before and we thought was exactly the right thing to do. Therefore, as you have seen deposit crisis according to what happened, deposit prices have been coming accordingly down, deposit prices are on a downward trend and I think that trend will continue in the foreseeable future given that the liquidity rules are still being executed in terms of the Bank’s decreasing liquidity buffers and the Funding for Lending Scheme will become a reality as the approved loans will be drawn over the next few months.

Tom Rayner – Exane BNP Paribas: Can I just have one quick one, sorry, I didn’t advertise the second one, but did I hear you correctly, you mentioned the non-core run-off as being capital accretive? Is that a slight change in language? I know the constraint has been previously as fast as possible within sort of capital neutral. Capital accretive might sound like a slight increase in confidence over how that’s going, is that fair?

Antonio Horta-Osorio – Group Chief Executive: I mean we have always said, if you remember at the strategic review, we have always said that we would do the reductions from ’12 to ’14 in a capital accretive way. Then we actually did ’11 reductions in a capital accretive way as well. When I – I think this is one from a conversation you and I had in one of the meetings we had where I told you that, if I had to arbitrate I would go as quickly as possible, so it could potentially become close to zero. It is a fact that we have been going much faster than we thought, still in a capital accretive way and also with lower impairment guidance, which I really think is a quite robust and high quality results from our all our teams and we will continue doing so. I will continue to go as quickly as possible in a capital accretive way and within the impairment guidance we have just given to you.

Outlook

Claire Kane – RBC Capital Markets: I just have a couple of questions please. The first is on your liquidity managements, you seem to have recorded another quarter strong gains, I think around GBP650 million on sales of your government bonds. I was just wondering if you could tell us how much more we could expect to come through from this and give us maybe an update on your unrealized gains in the AFS reserve to think we’re about GBP1.3 billion at the end of June. Then my second question really is on capital. Just wondering if you’d be able to give us maybe a bit more color on the potential upside regarding your conservative assumptions relating to the reductions and whether there is any change in your view relating to the focus on absolute capital levels versus RWAs, and if you could give us any color on what that absolute target is going forward through 2013?

George Culmer – Group Finance Director: It’s George. I’ll answer your few questions there. I mean, first up, what to do with the reversals, (as far as) during the capital position, when I first come out, in the business now for about four-five months, I first came at May, I said I thought, I was very comfortable with the capital position of the Company and the prospects of the Company and I’m very comfortable repeating that today after everything that’s happened in (summer) in terms of press comments and speculation, I remain very comfortable with the capital position of the business. In terms of some of the specifics, in terms of when we look at these are (about) fully loaded Basel III, as I said, (has gone from) 7.1% to 7.7% in the first nine months of the year, and that’s after things like the PPI (et cetera) that we’ve taken that. Within that we do, we think, show that on a pretty prudent basis. So within that, for example, we do (share) insurance on a (indiscernible) 45 as opposed to an (indiscernible) 46 and switch it from one to other would give around about just over a percentage point of improvement in our ratio. We take full allowance for example for things like CVAs and if there was carve-out for CVA corporates that would give us another 20 basis points on that. We also assume that we get 90 days, for example, our mortgages, if it went to 180, that give us a further 20 basis points on that and proposed – if there was this proposed 25 discounts on SME, RWAs that would be another 10 basis points. So when we show the fully loaded externally, we use a very sort of what we believe is a prudent and appropriate way of actually present that ratio. As I said there are a number of things where there is upside and a number of those matters. We are very active in terms of lobbying and hoping to secure on. So we continue to be capital generative. We continue to throw off 20 to 30 basis points of capital from our management actions. We continue to benefit from the reduction on risk-weighted assets and we manage to drive those capital ratios for (advance) at the same time putting aside significant sums to PPI. So I think it shows the effectiveness of our strategy and the list that I went through, hopefully it also outlines to you the appropriate way with which we present that ratio. So some of your other questions in terms of things like liquidity management and as such, yes, in terms of, again, as I said in the low interest rate environment, we have taken advantage to look at our funding, our liquidity, our balance sheet position. Yes, we’ve now realized gains, I mean it’s (not) GBP1.3 billion over the year, that’s quite deliberately in terms of coming short. We see no benefit in all some of the (indiscernible) those longer duration instruments with what the real economic yields are. So we’ve taken advantage actually of coming out of those instruments and coming shorter and more liquid in the current environment – in the current interest rate environment. We think that’s entirely appropriate. I’m not going to give you a forecast for the fourth quarter in terms of precise amounts, but given where interest rates remains be, I would expect this continue to be active, but I’m afraid I won’t give you a precise amount. In terms of available reserves on the balance sheet, there is still a significant amount. I think it’s of the order of about GBP3 billion or so. So that’s still significant (part) of that.