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Lloyds Bank Group PLC (LYG) Q4 2020 Earnings Call Transcript

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Lloyds Bank Group PLC (NYSE: LYG)
Q4 2020 Earnings Call
Feb 24, 2021, 4:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Robin Budenberg -- Chair

Good morning, everybody, and welcome to today's presentation. You'll be glad to hear that I don't intend to be a regular participant at these events, but I did want to say a few words today.

Firstly, I wanted to say how privileged I feel to be Chair of Lloyds Banking Group. It is a great organization with wonderful people, has a vital purpose given today's environment. And secondly, given the importance of maintaining momentum through chief executive transition, I want to say a few words about Strategic Review 2021 before handing over to Antonio and William.

This is an important time for the group. Our primary role, in line with our purpose this year, must be to support the UK's recovery from the pandemic. But given the continued acceleration change in our external environment, we must also be active in evolving our own strategy.

So, in order to maintain momentum, Strategic Review 2021 combines specific short-term no-regrets actions with an agreed long-term direction based on the transformation of the business over many years under Antonio's leadership. It will also allow Charlie Nunn to continue to shape the future of the business when he arrives in August. The Board is confident that this is the right approach.

In order to achieve these objectives, the team has taken the six key elements of our agreed longer-term direction; and for each of these, has identified clear areas for investment focus this year. In turn, these areas of investment focus have a set of specific underlying deliverables due this year and where appropriate over the medium term. This will allow us to make demonstrable progress on our journey this year and lay solid foundations for the future.

The Board and the management team are excited about the Strategic Review 2021. By enhancing our businesses and our capabilities in this way, we will be able to make real progress toward our aim of building the UK's preferred financial partner, while also playing an active role in helping Britain recover.

So, now, I'd like to hand over to Antonio and William. Thank you.

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Antonio Horta-Osorio -- Executive Director and Group Chief Executive Officer

Good morning, everybody. Thank you for joining our 2020 full-year results presentation. And thank you, Robin, for your words.

I will begin by providing a brief overview of results and our recent strategic progress. William will then discuss financials in more detail before updating you on the Strategic Review 2021.

Turning to slide 3 of the presentation. 2020 was a challenging year, given the significant impact coronavirus has had on our customers, colleagues and communities across the UK. I am deeply proud of the vital work that has been done by the group to support the UK economy and to help Britain recover throughout 2020.

Our colleagues across the group continue to demonstrate extraordinary resilience and dedication, supporting our customers and communities in very difficult circumstances. Our long-run transformation and investment has enabled continued delivery and positioned us well through the pandemic.

We have continued to serve customers through their channel of preference. And testament to this customer focus, we have delivered record customer satisfaction levels during 2020 across multiple channels.

We have also seen the strength of our franchise further reinforced with deposit growth across our trusted brands of GBP39 billion in the year.

In addition, despite the pending be changing the way in which the majority of colleagues worked in 2020, we saw record employee engagement scores at both the UK high performing norm.

As we look ahead, we remain absolutely focused on working with all of our stakeholders to ensure a sustainable national recovery. As a result, our core long-standing purpose of helping Britain prosper has never been more important.

Turning to Helping Britain Prosper on slide 4 of the presentation. We launched our Helping Britain Prosper plan in 2014, the first UK bank to launch such a plan. Over the years, it has served to unite the group behind an inspiring set of evolving environmental and societal ambitions, which have enabled us to deliver significant impact in key areas where we believe we can make the biggest difference as the UK's largest financial services provider. This includes championing diversity as the first FTSE 100 company to set public gender and race targets as well as being one of the largest corporate donors in the UK.

Recognizing that societal demands are evolving, we must continue to strive for further progress in delivering a more responsible, sustainable and inclusive organization. To support this, we have today announced a number of new exciting actions that will complement our existing ESG ambitions and support our purpose.

Turning now to our financial performance on slide 5. The group's financial performance in 2020 was inevitably impacted by the low rate environment, as well as depressed customer activity and the significant deterioration in the economic outlook in the first half.

As a result, net income of GBP14.4 billion was 16% lower than 2019. We maintained our rigorous approach to cost management, with total costs down 4%, although this did not fully offset the more challenging revenue environment with pre-provisioning operating profit down 27%.

The impairment charge of GBP4.2 billion was largely taken in the first half. The economic outlook has improved slightly since Q3 and our actual credit experiences continue to remain stable.

Our balance sheet remains strong and we delivered stable RWAs of GBP203 billion in the year, while growing in selected areas such as mortgages, especially in the second half of the year. Given our strong capital position at the year-end, the Board has recommended a final ordinary dividend of GBP0.57 per share, the maximum allowed under the PRA guidelines.

Turning to slide 6, of the economy. We have seen unprecedented levels of contraction in the UK economy in 2020 as a result of the lockdown measures. The economy has, however, benefited from significant levels of government support, which has been fundamental in limiting the impact from the crisis.

HPI has performed well in 2020 as customers took advantage of the stamp duty holiday and additional savings to adapt their home preferences to the changing environment. In addition, while customer spending fell sharply in March and April, we have seen some recovery throughout the year, although some sectors are still well below pre-crisis levels.

We have started to see the unemployment rate gradually pickup, but this continues to be supported by the coronavirus job retention scheme, which has been extended to at least the end of April.

Finally, while UK consumer credit fell sharply, the spending was constrained, growth in household deposits increased to over 10% as consumers reduced spending and increased savings. This has been the right approach, given the very significant uncertainties the pandemic has produced. As an integrated provider of banking, insurance and wealth needs, we believe this higher savings trend offers attractive opportunities for future growth.

Turning now to slide 7. Ahead of William taking you through the latest evolution of the Group's strategy, I would like to briefly reflect on our business transformation since 2011. In this period, we have successfully shifted our focus from one of restructuring to one of selective growth and investments.

#execution in this period has created clear competitive advantages. In addition to significant improvements for customers and colleagues, we have delivered for shareholders across a number of areas.

Moving now to look at the most recent stage of this journey, GSR3, on slide 8. In 2018, we launched GSR3 with the aim of transforming the group for success in a digital world. Despite our external environment changing significantly during this period, we achieved the majority of our targeted outcomes with outperformance in a number of areas, underpinned by record investments.

Over the last three years, we delivered for our customers with innovative products and services. We continued to expand the reach of our digital franchise and created a comprehensive insurance and wealth offering, two areas that I will talk about in more detail shortly.

And finally, we continued to equip our people with the skills and capabilities to deliver our transformation, while creating a group that everybody can be proud of. These successes during GSR3 have laid the foundations for the Strategic Review 2021.

Turning now to slide 9. We have the largest digital bank in the UK, with 17.4 million digitally active users and 12.5 million mobile app users. Both of these have grown at pace over the course of the last three years.

Importantly, as you have heard, growth in these channels has been matched by continued increase in customer satisfaction. We have been able to effectively respond to changing customer preferences, and we believe that the key components of our competitive advantage is our differentiated multi-brands, multi-channel model supporting our segmentation strategy, alongside the largest branch network in the UK.

The growth in our digital channel also provides the group with capabilities to effectively compete with new digital-only challengers with a marginal cost to serve or just GBP15 for those customers who opt for a digital-only offering. This value that we can create through digital for our customers is the result of continued targeted investments as we see further opportunities here.

Turning now to our Insurance & Wealth business on slide 10. Our priorities in Insurance & Wealth during GSR3 were to drive momentum in the business and create the capabilities for future growth. This has resulted in market share gains across multiple insurance markets, such as 5 percentage point increases in both home insurance and corporate pensions. In addition, our strategic actions have enabled an enhanced wealth offering that will allow us to meet the various financial needs of our customers.

At the end of 2018, we announced a strategic partnership with Schroders combining our significant customer base with extensive distribution capabilities of Schroders' investment and wealth management expertise.

While the pandemic has inevitably caused some delays, our ambition to become a top three financial planning business remains unchanged. We now although expect to achieve this by the end of 2005, two years later than originally planned. This partnership not only enhances our customer offering, but will also provide greater income diversification in a low rate environment.

Turning now to summarize on slide 11. Our successful transformation across GSR1 to 3 positions the group well for the future. We have built clear competitive advantages, including our leading focus on efficiency, which has created the capacity for increasing levels of investments.

In turn, this has enabled ongoing improvements to our customer offering and internal processes as well as providing the optionality to unlock new investment opportunities, while producing sustainable and superior returns for our shareholders. This combined with our other core capabilities creates the strong foundations for Strategic Review 2021.

Thank you. I would now like to hand over to William, who will discuss our 2020 financial performance before presenting the Strategic Review 2021.

William Chalmers -- Executive Director and Chief Financial Officer

Thank you, Antonio. And good morning, everyone. I'll now run through the 2020 results before discussing the Strategic Review 2021 and opening up for Q&A.

Turning first to slide 13, an overview of the financials. Net income of GBP14.4 billion is down 16% year-on-year. As you know, this was largely driven by bank base rate reductions, change in asset mix and lower levels of activity.

In the context of this challenging environment, the group continued to demonstrate cost discipline, with costs down 4%. Meanwhile, the cost to income ratio has clearly been impacted by the revenue environment, but remains low compared to peers.

Pre-provisioning operating profit of GBP6.4 billion included GBP1.4 billion profit in Q4, broadly in line with Q3. The impairment experienced in the fourth quarter has been better than expected at Q3, reflecting a somewhat improved macroeconomic outlook and stable credit experience in the quarter.

Statutory profit before tax of GBP1.2 billion was down 72% year-on-year due to the income developments and, of course, the impairment charge taken in the first half.

TNAV was stable at GBP0.523 per share. Meanwhile, the CET1 ratio increased to 16.2% post the full-year dividend of GBP0.57 per share.

I'll now turn to slide 14 and look at how the Group's customer franchise performed across 2020. Total mortgage balances were up GBP5.2 billion in the year. And in line with our expectations, the open book was up GBP6.7 million in the fourth quarter. We expect open book mortgage balances to continue to grow in the first quarter of 2021 and expect net open book mortgage growth over the full year.

Credit card balances were significantly impacted by the pandemic, reducing levels of activity, with balances down 19% for the year. Motor finance and unsecured loans were also lower, a 6% and 5% reduction respectively. Given the continued activity restrictions, we expect consumer finance balances to be lower in the first half of 2021 before starting to recover in H2.

In commercial, SME balances were up GBP.5 billion, predominantly driven by Bounce Back Loan lending. We've now delivered more than GBP12 billion of government guaranteed lending, with a market share of 17%. Corporate and institutional balances were down GBP8.6 billion in 2020 as corporates reduced RCF usage as we continue to work on low returning relationships.

In totality, this resulted in flat AIEAs over the year. Based on our current macroeconomic expectations, we expect AIEAs to be flat to modestly up in 2021.

Retail deposits were up nearly GBP31 billion over the year, with current account growth of more than GBP20 billion. This was ahead of the market. Commercial balances were up around GBP8 billion. And here, the increase in SME deposits, partially driven by government-backed lending held on deposit, more than offset the corporate and institutional reduction, the latter again significantly a function of our pricing activity.

Turning to net interest income on slide 15. Net interest income for the year was GBP10.8 billion, a decrease of 13% on 2019. Given the stable AIEAs, this was largely driven by rate and yield curve headwinds and also partly a function of customer assistance measures -- for example, in overdrafts -- together resulting in a NIM of 252 basis points.

Our Q4 margin of 246 basis points was slightly better than the guidance given at Q3. This benefited from a number of tailwinds, including lower funding costs, better mortgage margins, RCF repayments and a small benefit from deposit repricing. The principal headwind was reduced earnings from the structural hedge.

Looking forward, we expect the net interest margin to be in excess of 240 basis points for 2021. Mortgage margins are expected to continue to be attractive for the time being, alongside further optimization in commercial. This will be offset by lower unsecured lending balances and pressure from the structural hedge, the latter particularly in H2.

I'll turn to slide 16 to look at margin dynamics in more detail. Now, I've already mentioned a strong mortgage performance that we've seen. We've built higher balances at attractive new business mortgage margins, with completions in Q4 at circa 190 basis points. This is higher than mature in front book business and helped offset the structural hedge drag in Q4. Consumer finance, meanwhile, continued to be impacted by the change in asset mix in H2, particularly the reduction in card balances.

The margin dilution in commercial banking in the second half was partly driven by the volume of Bounce Back Loans and CBILS. Where the margin is lower than lending on our standard terms, we of course benefit from the government guarantee.

Now turning to slide 17 to look at deposits. The deposit story in 2020 has been little short of remarkable, an increase of nearly GBP40 billion. In retail, we've seen inflows from new customers, while also increasing current account average balances, increasing given reduced spending.

Commercial balance increases were largely driven by cash reserves, partly through Bounce Back and CBIL loans being placed on deposits, as well as their outgoings.

Deposit margin was broadly in line with H1 and continues to be lower than 2019, given the lower rate environment. Growing deposit balances in turn provide an opportunity to build on wealth and financial planning propositions to better support customers as you've heard from Antonio.

Now turning to look at the structural hedge on slide 18. Total structural hedge earnings in 2020 were GBP2.4 billion. The hedge balance has increased by GBP7 billion in 2020 to GBP186 billion, up GBP1 billion in Q4.

Swap rates began to recover in the 4th quarter and we've seen that recovery continue this year. We're taking advantage of this to reinvest maturities for longer term, with the weighted average life of the hedge increasing accordingly to 2.5 years at the year-end.

Furthermore, hedge activity has also increased, providing additional flexibility going forward. The GBP25 billion increase in capacity is significantly driven by balance sheet mix, alongside deposit growth. For example, GBP11 billion of the increase in capacity is the result of moving the portfolio of commercial deposit balances from base rate linked to managed rate during the, and hence proportion are now eligible to be included in the hedge.

Looking forward into 2021, given the circa GBP60 billion of maturities and current yield curve expectations, we expect the hedge earnings to reduce by circa GBP400 million compared to 2020. Thereafter, in 2022 and 2023, we expect the annual income headwind from hedge maturities to be materially lower.

Now turning to slide 19 to look at other income. Other income of GBP4.5 billion was down 21% from 2019, with ROI in Q4 of GBP1.1 billion. Over the year, retail other income was impacted by lower interchange fees and Lex fleet volumes. Commercial was impacted by reduced levels of client activity, specifically within transaction bank. Insurance & Wealth was impacted by lower new business volumes, negative assumption changes and a reduction in non-recurring items. And in central items, income was impacted by reduced gilt gains. We also saw some impact year-on-year on our equity business.

Looking forward, as we begin to see the easing of restrictions and increased customer activity, we would expect other income to gradually recover. We also continue to invest in income diversification opportunities over the medium term.

Now moving to slide 20 and costs. In 2020, we further reduced both operating costs and BAU costs by 4%, with delivery of our enhanced cost target of below GBP7.6 billion. This equates to circa GBP300 million reduction in absolute costs in 2020 and circa GBP600 million across the last two years.

In the year, we balanced headwinds from COVID costs with tailwinds from reduced variable remuneration. In relation to investment spend and consistent with the last two years, we capitalized 63% of the above-the-line cash spend. Remediation of GBP379 million, 15% lower year-on-year, reflects charges across a number of existing programs.

Looking forward into 2021, we expect COVID-related costs to remain elevated as we continue with hygiene expenses and potentially increasing customer financial assistance issues. We're also planning to increase variable remuneration costs in 2021. We expect to be able to fully absorb these headwinds through our ongoing cost reduction activity and for our operating costs to continue to fall to circa GBP7.5 billion this year.

Opportunities remain to continue our cost trajectory over the medium term, which I'll briefly touch upon in the next slide. Our focus on efficiency and cost reduction is fundamental to our business model. We've reduced BAU costs by 24% since the start of GSR2. This in turn has created room for significant business investment in recent years and it continues to do so. Today, we continue to look at our strategy of cost reduction across the group.

We look at our cost framework involving three parts. Number one, our BAU cost management is outstanding. Continues to offer opportunity, for example, third-party suppliers, organizational design and automation.

Second, COVID-related opportunities. Whilst the pandemic has brought additional cost pressures in the near term, we do believe there are both ways to manage this carefully and also medium-term structural opportunities, for example, in workplace and in travel.

And thirdly, there are emerging strategic opportunities presented by technology, both in our operations and in our interactions with our customers and colleagues. These require investment.

Indeed, as we continue to adapt our business to the changing environment, we will maintain high levels of strategic investment, with GBP0.9 billion committed this year, including technology R&D. I'll talk more about this later on.

Now turning to slide 22 to look at impairments. The observed credit experience in Q4 has been very stable. The Q4 impairment charge is GBP128 million. Within this, retail charge of GBP383 million in the quarter is only a little above the pre-pandemic run rate and in line with Q3. Commercial charges in Q4 remain low and coronavirus-impacted restructuring cases have performed better than expected, generating a small release in the quarter.

Macroeconomic outlook has improved slightly since Q3 despite the current national lockdown, given vaccine rollout and the extension of government support. We now expect peak unemployment to be 8% in Q3 2021, lower than the previous expectation of 9% in Q1. HPI performance has also been better than expected in 2020, as Antonio mentioned earlier on.

This improved macroeconomic forecast generates releases in our models. However, given the unusually wide range of uncertainties in the current environment, such as virus mutations and extended lockdown, we've taken an additional GBP400 million management overlay to partially offset these. Our Q4 impairment charge of GBP128 million is net of this additional overlay.

Based on our current macroeconomic assumptions, we expect 2021 impairment charge to return closer to pre-pandemic levels and the net asset quality ratio to be below 40 basis points.

Now turning to slide 23 to look at coverage. Our total stock of ECL of GBP6.9 billion was GBP2.7 billion higher than December 2019. GBP4.3 billion of that relates to Stage 1 and Stage 2 exposures, which provides significant resilience to absorb headwinds as and when losses begin to emerge. Meanwhile, coverage levels have increased across all products and write-offs continue to be at pre-crisis levels across the book.

Turning to the next page, balance sheet remained strong with circa 85% of group lending secured. In mortgages, the quality of our book continues to improve, with loan to value ratio now at 43.5%, down 1.4 percentage points compared with 2019. More than 91% of the mortgage book now has an LTV of 80% or less.

Looking at our retail credit experience, we continue to see low new to arrears levels across the portfolio, at or below pre-crisis levels despite the majority of payment holidays ending.

Let's take a look at the payment holidays. Payment holidays have been effective in managing customers through the crisis. 98% of first payment holidays have now matured, with 89% of customers resuming payments. Of the remaining 11%, half are on extended payment holidays and half are on arrears. Roughly a third of those in arrears were in arrears before payment holiday was granted. New payment holidays granted remain very low compared to H1 levels, with only 28,000 initiated during the latest national lockdown. And in commercial, the vast majority of commercial repayment holidays have now matured with more than 85% repaying.

Now look briefly at the group's exposure to certain commercial sectors on slide 26. Within the commercial portfolio, our exposure to the sectors most impacted by coronavirus remains modest to around 2% of group lending.

We've seen some deterioration in the credit ratings of these vulnerable sectors during the year as we expected, with the percentage of investment grade reducing 8 points to 38%. As context, however, our new to business support unit levels in H2 were in line with pre-crisis levels. SME credit performance meanwhile remained stable, less than GBP20 million of write-offs in 2020.

Our commercial real estate portfolio continues to be managed with average LTV at 50% and through significant risk transfers.

I'll now move to slide 27 to look at below-the-line items. Total below-the-line items in 2020 were significantly lower than in 2019, given the reduction in the PPI charge. Restructuring costs were, however, up 11% year-on-year. I'll talk briefly on these in the next slide.

Volatility and other items included negative insurance volatility, the usual fair value unwind and a loss of GBP106 million relating to liability management exercises, largely in the fourth quarter. This was partially offset by positive banking volatility.

As you can see, we've taken a PPI charge of GBP85 million in Q4. This was principally driven by the financial impact of delays in operational activities, given coronavirus, and the final stages of work ahead of an orderly closure of program. Today, more than 99% pre-deadline queries have been processed.

Moving down, the in-year tax credit of GBP161 million reflects the DTA measurement benefit in Q1.

Statutory return on tangible equity was 3.7% in 2020. Looking forward, and in order to aid comparability across the sector, the group will report its statutory RoTE without adding back the post-tax amortization of intangible assets.

On this new basis and given improving profitability, group is targeting a return on tangible equity of between 5% and 7% in 2021, on a path to our medium term target of earning higher than cost of equity returns.

Now moving on to slide 28 to look at restructuring charges in more detail. Restructuring charges of GBP521 million included GBP233 million in Q4. Following the resumption of roll reduction activities, severance charges of GBP156 million in 2020 were accelerated in Q4. Property transformation costs of GBP146 million were largely in the second half as branch and office rationalization activities picked up.

Technology R&D charges relate to costs associated with our initial investigation of new technology capabilities. I'll provide more detail on the initiatives here later on in the presentation, but these activities are at an exploratory stage and they represent serious opportunities that we're looking at deliver and to accelerate transformation.

Looking forward, we expect to continue to increase investment in technology R&D and therefore expect restructuring charges to be somewhat higher in 2021.

Moving on to look at risk-weighted assets. Risk-weighted assets were flat in 2020, supported by strong RWA management. 2021, we expect RWAs to be broadly stable on 2020, with continued optimization within commercial, offsetting some expected credit migration and asset growth.

As we look forward into 2022, we do expect RWA inflation from regulatory change. Further out, we do not expect the impact from Basel 3.1 output floor to be material until the latter part of the implementation phase toward 2028.

Now turning to capital. Our CET1 ratio ended the year at 16.2% following the announced dividend of GBP0.57 per share. This strong capital base remains significantly above both our ongoing internal capital target of circa 13.5% and our regulatory capital requirement of around 11%.

CET1 ratio included 51 basis points from the change in treatment of software intangibles during the final quarter. CET1 also continues to benefit from the 115 basis points of IFRS 9 transition release. We expect slightly more than half of the 83 basis point in-year benefit to unwind in 2021, with the remainder in 2022. Therefore, in 2021, we expect capital build to be impacted both by profitability and by the expected IFRS 9 transitional unwind.

[Indecipherable] in respect to the valuations of the group's three main defined benefit pension schemes. Future deficit contributions will equate to circa GBP800 million per annum, plus 30% in-year capital distributions, up to a limit of GBP2 billion per annum until the deficit of GBP7.3 billion has been removed.

As Antonio mentioned earlier, we have today announced a dividend of GBP0.57 per share. This is the maximum allowed under PRA guidelines. The Board remains committed to future capital returns. In 2021, the Board also intends to accrue dividends and resume its progressive and sustainable ordinary dividend policy at a dividend higher than the 2020 level. As normal, the Board will consider the size of the final dividend payment and the further return of any surplus capital based on circumstances of the year-end.

That concludes the review of the financials, and we'll now move to short videos on the executive team outlining Strategic Review 2021 before I go on to discuss that in more detail. I do hope you enjoy it.

[Video Presentation]

Welcome back, everybody. I hope our short video helped give you a flavor of our vision, the Strategic Review 2021 and the work that the entire board and executive management team has put into it over the last few months.

I'll take you through a few of the highlights now. Firstly, turning to slide 32 on the opportunities and the challenges ahead of us. As you well know, 2020 was a year of significant change for both society and the economy as a result of the pandemic. We've also seen a significant acceleration in longer-term strategic trends in our sector, including the move to digital.

While change of this scale undoubtedly creates challenges and the path to recovery for the UK will not be linear, strong foundations we have at Lloyds position us well to rise to these challenges. We want to take a leading and transformational role in many of the opportunities that change creates.

I'll now provide an overview of how we plan to do this with an overview of Strategic Review 2021 on the next slide. Strategic Review 2021 will deliver meaningful improvement for our customers and colleagues. It will also support the creation of sustainable shareholder value through revenue generation and diversification, further efficiency gains and disciplined growth.

Through Strategic Review 2021, we will accelerate our transformation to build the UK's preferred financial partner. Following points are key. First, as you heard earlier, our purpose of Helping Britain Prosper is more important than ever. In Strategic Review 2021, we will center this effort on helping Britain recover, supporting our customers' financial health and resilience through areas of focus that are fully embedded in the business.

Second, across our core business areas of retail, insurance and wealth and commercial banking, we will bring further alignment and improvement to unlock coordinated growth opportunities. This will be supported by further enhancing our core capabilities that enable sustainable success in the new environment, specifically technology, payments, data and our people.

Third, Strategic Review 2021 includes clear execution outcomes for the year, underpinned by long-term strategic vision in each area. Our business and capability priorities, as outlined here, are built on our transformation to date. They were and will continue to be the foundations of our success long into the future.

All of these items will be supported by significant levels of strategic investment. Together with our execution credibility, Strategic Review 2021 will thereby ensure the group continues to build momentum during a period of management and environmental change.

To begin, I'd like to turn to Helping Britain Recover on the next slide. The impact of the pandemic has been felt by everyone. Its social and economic effects on the UK are likely to be long-lasting. As a result, consistent with our purpose to help Britain prosper in 2021, we will focus on helping Britain recover with objectives that are, again, fully embedded in our business.

Our response takes action in five key areas where we believe we can make a difference. Measures includes supporting our personal and business customers through the recovery, with dedicated financial and well-being support. Expanding the availability of affordable and quality housing and delivering on our broader environmental and societal objectives.

Through our actions in these areas, we will play our role in creating an environmentally sustainable and inclusive future for the UK. In doing so, we will build a successful and enduring business on which we can all be proud.

Turning to our business based initiatives on slide 35. To give you a framework, in each of our two customer segments and four capabilities, we lay out our opportunity, our ideas for investment in 2021 and some examples of how you can expect us to measure our success in 2021 and beyond.

Looking first at personal customers. Our personal customer franchise has truly unique foundations. We hold a relationship with around half of the UK adult population and operate the largest digital bank in the UK as part of our multi-brand, multi-channel strategy.

As we look ahead, we see scope to grow our franchise by significantly deepening our relationships with priority segment customers, reaching more of our customers' broader financial needs, particularly where a number of these are currently met by other providers is a priority. This will be achieved by increasing personalization and by leveraging our unique capabilities as an integrated provider of both Banking and Insurance & Wealth services.

We will also look to reduce our cost to serve across segments through further digitization. Here, for measures of success in 2021, we expect to grow the open mortgage book. We're going to also maintain our old channel NPS which hit record high levels in 2020.

And looking beyond this, in line with our focus on meeting more of our customers' financial needs, we intend to deliver GBP25 billion net new money growth in Insurance & Wealth by 2023. The latter represents wholly organic growth and a further progression in the open book growth delivered in GSR3.

Moving now to Best Bank for Business on slide 36. Our vision for Strategic Review 2021 in commercial banking is to be the best bank for business. Our commercial business has outstanding reach, which is supported by our brand and scale, our above-market growth in SME and a strong presence among large corporate clients, including active relationships with more than 60% of the FTSE 100.

Our actions here are central in enhancing our capabilities to better serve the financial needs across our client base, while maintaining our strong returns discipline. A disciplined and strengthened business.

In SME, we are investing in opportunities to add value to our client offering, including our digital proposition. This will build greater origination and self-service capabilities for simple working capital products alongside improved client-driven solutions such as online financial management services. The combination of these will result in more than 50% growth in digital-linked origination in 2021, as well as supporting a 5 increase in NPS over the next three years.

We will strengthen our corporate institutional offering by increasing product and delivery capabilities across core market areas, such as FX and GBP rates. Our investment here is in replatforming and in digitizing to deliver more competitive capabilities and a more efficient model. This is intended to improve share and client returns in our existing relationships where we are underrepresented and where we have a right to win.

Turning now to our investment in technology on slide 37. During GSR3, we significantly increased our investment in technology. This enhanced the scale and speed at which we could deliver transformation initiatives and improved our offering to customers.

However, with the pace of change accelerating, we must, of course, take the next step. We need to further modernize our technology architecture to deliver better customer propositions and to structurally improve operational efficiency and agility.

In 2021, as previously mentioned, we will continue to improve our digital offerings to both personal customers and commercial clients, increasing self service capability. This includes doubling the volume of releases on our mobile app in 2021, while investment in cloud will allow us to create new features for customers more quickly and more efficiently. Improvements in scale are necessary for continued customer satisfaction to allow us to maintain our record mobile app NPS.

As a further component of our technology modernization, in 2021, we're investing in the foundations of transformation by further proving and leveraging our public cloud capabilities. This is a precursor to simplifying our legacy estate. While I must stress we're currently at an early stage, significant opportunities exist. Around 60% of our technology estate is currently targeted for migration over the longer term, with a significant proportion of this to be achieved over the next three years.

I'd now like to spend a few moments discussing our technology R&D investment in more detail in slide 38. As highlighted on the previous slide, our investment in technology over GSR3 allowed us to significantly improve our customer offering, while contributing meaningfully to ongoing reductions in the operating cost base.

We're now looking at significant impact the next generation technologies could have on our organization by delivering a step change in customer propositions and efficiency. Consequently, we are increasing our R&D investment in this area. This is supported by a number of our strategic partnerships as specialist providers.

As an example of what we expect to achieve with this investment, in 2021, we are undertaking a pilot to safely migrate around 400,000 back book customer accounts to a new bank architecture to test these capabilities. We expect this to deliver around a 40% reduction in the applications associated with the legacy architecture of this portfolio, giving us insight into possible broader benefits. Our experience in 2021 will determine the pace and scale of further rollout. We will update you on our progress accordingly.

These new technologies have the potential to deliver meaningful enhancements to customer propositions and experiences and to deliver a simpler, more efficient and more agile organization. Quite apart from other benefits, this is required to unlock the next generation of cost opportunities over the long term.

Success is, of course, not guaranteed, but we believe it is right to make an investment of this kind. Indeed, it's our efficiency that has given us the ability to consider investments such as these, which in turn are in part aimed at further enhancing our efficiency. Charges relating to this R&D investment are included in our strategic investment spend and will be taken within restructured.

Turning now to payments on slide 39. In line with the nationwide scale of our franchise, the foundations for our payments business are outstanding. We are a leading player in this market as the largest card issuer in UK and the fourth largest acquirer. It is also a sub-sector in the midst of significant change, where we have a very strong position to both defend and to grow.

Our brand, our reach and our issuer acquirer strength provides opportunities to build the business in what is an attractive market delivering additional revenues and greater diversification. For example, in retail, e-commerce represented nearly 50% of all debit spend in 2020. We aim to preserve and build our leading share.

In commercial, our share of customer relationships is significant, but we're nowhere near matching that share in merchant acquiring. Accordingly, in 2021, we will invest in enhancements to our consumer payments experience through increased functionality, such as click to pay and rewards based products and offers. This will support the maintenance of our leading spend market share in 2021 and allow growth in credit card spend market share from 2022.

In commercial, we will build on our GSR3 investment by further improving our cash management and payments platform. This will foster an ecosystem of services across payments, cash management and liquidity needs, allowing share gains among our corporate clients.

In parallel, to seize the significant and critical opportunity in merchant acquiring, we aim to enhance the distribution capabilities of our merchant services proposition. This will deliver 15% to 20% new client growth per annum starting in 2021.

Now moving to data on the next slide. We operate one of the largest databases within the UK. We see this as a unique asset that should allow us to deliver huge value-add to our customers.

Our investment to date significantly improved our use of data. Today, 20% of customer needs are met by date-led marketing where we're able to more effectively communicate with our customers and to deliver solutions that matter to them. This number is a start, but it also offers significant upside.

In Strategic Review 2021, we're therefore prioritizing investment in data capabilities to deliver more effective outcomes for our customers and for our colleagues. Through better integration of and access to data, we will be able to meet customer needs more rapidly and more effectively and enable more personalized propositions. This will unlock opportunities in identifying meeting more existing personal customer banking and insurance needs.

As part of this, we're investing in materially extending machine learning and advanced analytics capabilities across the organization to support customer and business outcomes. For example, by widening the use of machine learning, we will deliver at least a 10% reduction in fraud.

In advanced analytics, we have a number of use cases under way across multiple products. For example, we're targeting a 20% increase in home insurance needs met through our direct channels. There's then obvious scope to extend these capabilities to a broader suite of products across the group over time.

Advanced analytics will also be used to deliver early insights into financial vulnerabilities, particularly important as our personal customers and business clients recover from the effects of the pandemic.

Our investment in advanced analytics is expected to deliver a 50% return on investment in the first year, creating capacity for further investment thereafter.

And finally, but critically, let's look at Reimagined Ways of Working on slide 41. As you heard in Antonio's earlier remarks, colleague engagement is at an all-time high at 81% and above the UK high performing norm. Our colleagues have been nothing short of outstanding in the way in which they've responded to the environment and the changes in their ways of working over the last 12 months.

The pandemic has accelerated many of the trends previously evident in the workplace. These require a reduced office footprint, but also enhanced workspaces to foster collaboration and creativity. It's very important that we respond to this opportunity to best serve our colleagues and also to enhance efficiency.

In Strategic Review 2021, our areas of focus for investment include refreshed values and behaviors to build on our purpose-led culture and further embed Helping Britain Recover into the organization.

We will also invest in reducing our office footprint with a cumulative reduction of around 20% over the next three years, including 8% in 2021. Combined with the 23% reduction in GSR3, this reflects a significant change in our footprint.

Alongside these steps, we will develop our workspaces and ways of working to best reflect changing colleague expectations, while we further invest in our talent through upskilling and career pathways. This is intended to deliver a more diverse, skilled and future-ready workforce that will support progress toward our gender and race targets, which reflect the society we serve.

Turning now to slide 42. With our focus on execution, we are also providing guidance for 2021 financials, consistent with the objectives that I've outlined. Clearly, all guidance is based on our current macroeconomic assumptions.

We expect the net interest margin to be in excess of 240 basis points. We continue to see further opportunities on costs and we expect operating costs to reduce further to circa GBP7.5 billion.

On credit quality, we expect a net AQR of below 40 basis points for the year. Combination of these should support improving profitability in 2021 and we expect a statutory RoTE of between 5% and 7% for the year.

On capital, we expect to see broadly stable RWAs in 2021.

In respect to capital distribution, we're very pleased to have been able to resume dividends, given their importance for our shareholders. In 2021, the board intends to accrue dividends and resume its progressive and sustainable ordinary dividend policy as a dividend higher than the 2020 level. As known [Phonetic], the board will consider the interim dividend at half year and the size of the final dividend payment and further return of any surplus capital based on the circumstances at year-end.

On our strategy in the times of management change, we hope today we've portrayed to you a continued strong focus on execution, underpinned by strategic vision for sustainable success in the new environment. We believe these factors will enable delivery of a medium term statutory RoTE in excess of our cost of equity.

Finally, to summarize on slide 43. I appreciate that we've covered a lot of ground across a number of topics this morning. Before closing, I want to take a moment to reiterate the building blocks of Strategic Review 2021.

As a group, we have a very clear strategy that is fully aligned to our purpose and represents a further evolution of our long run transformation. In Strategic Review 2021, we will intensify our focus on Helping Britain Recover, with key objectives aimed at this outcome, fully embedded in the business.

Strategic Review 2021 will unlock coordinated growth opportunities across our core business areas of retail, insurance and wealth and commercial banking. These objectives will be enabled by four enhanced capabilities that cover the breadth our organization.

And finally, and as just highlighted, to deliver Strategic Review 2021, we have clear execution outcomes for the coming year across all of these pillars, with each of these underpinned by long-term strategic vision and supported by significant strategic investment.

This combination will enable the team to effectively deliver Strategic Review 2021 and to build the UK's preferred financial partner.

Thank you for listening. That concludes today's presentation. We'll be happy to take questions. I'm aware that we only have around 30 minutes or so scheduled for Q&A, but we can run a little longer if necessary. So, we'll take questions from here. Thank you.

Questions and Answers:

Operator

[Operator Instructions]. Your first question comes from Rahul Sinha of J.P. Morgan. Please go ahead.

Rahul Sinha -- J.P. Morgan -- Analyst

Good morning, everybody. Thanks very much for taking my questions. I've got one on strategy and a couple of follow-ups on numbers, if that's OK. On the strategy, obviously, the delay in terms of hitting the top three financial planning business target out to 2025 is quite understandable. But I was wondering if you could maybe give us a little bit more color on where you've managed to reach currently with the JV in terms of your numbers and what do you think changes from here will actually accelerate customer acquisition or, let's say, market share gains to mainly to achieve that target?

And then, on the numbers, I was wondering if you could maybe comment a little bit more on the NIM trajectory, and specifically whether you're expecting NIM to be down in the first half of the year, especially in the first quarter, given the weakness in unsecured and your sort of back-end loaded recovery there.

And then, on numbers as well, just very quickly on RWAs, I was wondering if you could -- it looks like there are quite a few capital headwinds heading toward us in 2022. So, the pension contribution that you outlined and you've got the 51 basis points of intangibles running off. I guess the third part, looking forward, really, any quantification on the RWA headwind that we had to factor in 2022? Thanks very much.

William Chalmers -- Executive Director and Chief Financial Officer

Thanks very much, Rahul, for the questions. Dealing with the -- well, I guess, each of them in order. On SPW, the last couple of years, as you know, has been primarily involved in setting up SPW, so that it is in a position of strength to ensure the offering to our customer base. In that respect, we've had the asset migration to the new platform. We've set up 11 regional hubs. We now have increased referral volumes coming through and we also have a new CEO in place to deliver the plan. So, as your question points out, we have had a delay in meeting our ambitions, primarily because of the coronavirus crisis, but we think the business is now very well set up to deliver plans going forward, and indeed, to be a big part of that GBP25 billion AUM target as laid out earlier on. So, that's what -- hopefully that answers what's changing from here and why we expect the business to succeed going forward.

On your second question, NIM trajectory, I actually suspect it will be the other way around. That is to say, we've come out of the Q4 at 2.46%, as you know. Our guidance is in excess of 2.40%. During the first quarter, we expect to see the NIM be relatively solid. The principal source of pressure is structural hedge in the second half. And in that context, it's just worth pointing out that some of the rates activity that we've seen lately, including the sort of somewhat steepening up the curve has been very helpful in mitigating that pressure on the structural hedge in the second half of the year, but the balance is, as I say, somewhat along the lines I've just portrayed.

On RWAs, for 2022, the picture, as I outlined in my comments earlier on, is one of some certain regulatory headwinds. And so, we're seeing those from a combination of CRR 2, number 1; mortgage floors, number 2; CRD IV, number 3. That is also supplemented by asset growth and that is clearly part of achieving our RoTE targets in excess of cost of equity. So, that's clearly very welcome. And it's also complemented by our usual disciplined RWA management approach, which is both using the market, but also addressing suboptimal returns in the commercial portfolio where appropriate. And so, those are all factors that play into it. By the time you get to 2022, we think that credit migration will be relatively limited. But if we take all of those in sum, Rahul, we are aware of consensus circa GBP215 billion or thereabouts. And we're pretty much comfortable with that, there or thereabouts.

Rahul Sinha -- J.P. Morgan -- Analyst

Thanks so much, William.

William Chalmers -- Executive Director and Chief Financial Officer

Thanks, Rahul.

Operator

Thank you. Your next question is from Guy Stebbings of Exane BNP Paribas. Please go ahead.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Good morning. Thanks for taking my questions. Could I, firstly, come back to NIM. Thanks for the color so far. I just wanted to check what your assumptions are in terms of mix on the asset growth, and in particular just on the consumer side. I think you hinted at a drop in the first half and a recovery in the second half. Just wondering where you think they'll end up and what's sort of baked into your NIM guidance. Does it sort out [Indecipherable] still be fractionally lower volume this year versus where they started the year. And are you assuming any more deposit repricing over the course of 2021?

Also, sort of lead to that on NII, just want to check, the average interest earning asset guidance to be up or -- flat to slightly up this year. Is that versus the FY '20 average number of 435 [Phonetic] or the Q4 number of 437 [Phonetic] or where you exited 2020 just to know where we're sort of starting from.

And then, just on other operating income, in particular insurance, which is obviously seeing quite a big drop in the second half of 2020. If you ignore the volatile life and pension experiences, other volatile items and just focused on the new business income, I think it drops from GBP394 million for the full year and dropped just GBP150 million in H2, driven by workplace, planning and retirement income and annuities. I'm just wondering how much for rebounds in some of these lines you expect to see in 2021 and then also what sort of timeframe you expect to see them pick back up to what we saw in prior years. Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Thanks, Guy. I guess again to address them in order, let's look at the NIM first. As we look forward into 2021, we have a couple of tailwinds and we have a couple of headwinds in the margin. So, addressing each of those, the tailwinds that we see are clearly in the mortgage book. We're seeing much higher front book mortgages margin, which in turn is replacing lower margin. And so, there is a positive effect on the margin from that mortgage's margin differential.

Secondly, I mentioned earlier on commercial banking optimization, which again is intended to address the lower returning relationships. There's also certain commercial banking activities, such as the reduction in RCS, for example, which lends support to the margin. And then I mentioned in my script earlier on, certain liability management actions that we've been taking, which, again, reduce our cost of funding and, therefore, lends strength to the margin.

In terms of the flip side of that, what are the headwinds, two or three. Back book running off is clearly one of them, although that clearly gets less as the back book gets smaller. Certainly, mortgage volumes. Mortgages at the current pricing are very welcome. And as you've seen, we wrote GBP6.7 billion of the open book in Q4 and we will continue to write at these very attractive prices. But as an average margin matter, they weight the margin down a little bit given the overall spread for the average.

And then finally, the structural hedge which I mentioned earlier on, which again is a dynamic that has been changing a fair bit over the course of the last few weeks by virtue of the rate strategy that seen, number one, and by virtue of the fact that we deliberately held back some investing when the curve was very flat last year, number 2, which has created capacity for us to invest in now as we see the curve start to sharpen up a bit.

Now, that structural hedge dynamic, again, was and sort of remains a source of pressure in the second half, but the extent of that source of pressure is mitigating by virtue of the rate movements that we are seeing.

So, hopefully, that addresses some of the questions on NIM. You did ask about deposit repricing and AIEAs. On deposit repricing, I will leave it up to the retail and commercial team to take the right business decisions in the best interest of customers, obviously, but I would say that our average deposit margin now is pretty low off the back of the base rate changes that we saw, and there isn't terribly much room [indiscernible 71:34]. So it's with that caveat, if you like.

And then, finally, AIEAs, that's versus Q4 number that we have given to you.

Insurance. Insurance, as you say, has been subject to certain headwinds during the course of 2020. A lot of that is to do with both the non-recurrent -- so some of the one-offs that we saw in the first half of 2019, as well as one or two non-recurring headwinds that were negative during the course of 2020. And I point you out there in particular to the assumptions review in Q4 for insurance, which is about GBP151 million. And you've seen that in our numbers, combination essentially of expenses and the persistency inputs. So, persistency and expenses led to a GBP151 million negative in insurance in that quarter.

Overall, I think as we look at insurance, the year of -- looking forward into 2021, we hope will be marked by a recovery in levels of activity, which should allow the insurance business to perform more strongly. I don't want to put a number on it too much, but certainly, as we look to OI as general matter in 2021, we do expect resuming levels of activity, particularly obviously when the lockdowns are lifted to contribute to the OI growth during the course of the year.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Okay, thanks very much. Can I just very quickly come back to your comment on balance [Indecipherable]. I think just to check, you talked about the mortgage growth this year, still being return positive, but negative in terms of mix from a margin point of view. So, can I infer from that that you're expecting mortgages to continue to grow well above consumer balances for this year?

William Chalmers -- Executive Director and Chief Financial Officer

Yes. I think -- let me address that, Guy. You mentioned in your question. The overall outlook for unsecured balances this year is a relatively weak first half, strengthening into the second half. What that adds up to in terms of net, I would expect not terribly much movement on the year. It might be a small positive. It might be a small negative. But, obviously, that predominantly depends on activity. I think some of the news from the government, as announced on Monday, is somewhat more positive than we had expected in that respect, i.e. it's a slightly earlier opening up with the national lockdown, which hopefully will lend itself to consumer activity, which hopefully will help build unsecured. But our background assumption, and you'll see this in the conditioning assumptions for our ECL and MBS cases was a bit more conservative than what the government announced. So, we might see a little bit better performance in unsecured than we had initially expected. We'll see.

But I think, Guy, on the particular part of your question, the open book mortgage growth is very much expected. And so, if you were to take things, if you like, on that like-for-like basis, it is likely that the mortgages balance outperforms the unsecured balance.

Antonio Horta-Osorio -- Executive Director and Group Chief Executive Officer

And, Guy, if I can give you some more color as to what William just said, as we said, by the way, in Q3, the mortgage market continues to be very strong since the first half of last year. It is not only pent-up demand relating to the stamp duty incentives, which, by the way, will likely be extended to ensure a smooth transition and no brakes on the chain, but also because many home movers are moving houses based on their preferences, given they now mostly work at home and they are moving to bigger houses outside cities and we clearly see a big increase in both first-time buyers and in-home movers.

And to give you an idea in terms of numbers, which might be helpful for you in anticipating what William said in relation to 2021, we have grown our open book of mortgages by GBP7.2 billion last year, out of which GBP6.7 billion was the growth in Q4. And to give you a second number, we came into the end of the year with approved mortgages that will complete in Q1 or have already completed in Q1 of around GBP14 billion, which is 50% above the level of the previous December, of December '19. So, with a very good momentum into Q1 and into 2021. And I really believe that this market is driven by several factors and will continue to perform well over the next one, two quarters, which is normally the degree of assurance and the degree of visibility that one normally has when we speak with you about the guidance and what we see on volumes and margins.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Very helpful. Thank you.

Operator

Thank you for that. Your next question is from Alvaro Serrano of Morgan Stanley. Please go ahead.

Alvaro Serrano -- Morgan Stanley -- Analyst

Hi, good morning. Thanks for taking my questions. A follow-up on the structural hedge and then one on capital returns, please. On the structural hedge, William, you've made it clear that there is more capacity to grow the structural hedge. I think it's GBP210 billion. Obviously, there's GBP60 billion rollovers this year. You've already flagged that the real sort of drag is more the second half. I'm just wondering, that GBP400 million, which you said it's kind of mark-to-market to the curves, how much of a growth in the structural hedge and reinvestment are you factoring in because, with a bit of steepening based on historically how Lloyds has behaved, I would guess that that could grow significantly?

Then the second question is on capital returns. Do you continue to target 13.5%? Should we continue to expect to all of the excess capital to be paid out? I realize there is transition elements to factor in. The question I'm asking is more related to the change of CEO and Chairman. And is there going to be ongoing focus on capital return? Is that still going to be predominant or do you anticipate sort of bolt-on acquisitions or M&A or some kind of growth initiatives that could sort of temper that maybe? Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Thanks so much, Alvaro. To give a bit of context on the structural hedge, essentially, during the second half of last year, last quarter of last year, we were looking at around GBP2.4 billion of income in the structural hedge on a hedge that lasted around 5 to 6 years. And so, that's kind of how we broke it down. The numbers are not precise, but they give you a kind of a sense as to what we were looking at.

When we look at the hedge today, we've got GBP60 billion of maturities in 2021. And by virtue of the hedge management strategy that we had, we were able to take advantage of the rate curve when it steepens as well step back from the rate curve when it's flat. As we look at that today, the GBP400 million that we've given is an indication of the recent status for those balances that we have locked in.

Now, if the rate curve stays in the shape that it is currently at and if we're able to lock in fully the benefits of that rate curve, then we would expect some benefit from that above and beyond the GBP400 million that I have indicated. There is also then, on top of that, the unutilized capacity of GBP25 billion, as you highlighted in your total of GBP210 billion there, i.e. the difference between GBP185 billion and GBP210 billion. And that would give us further upside as well, but obviously all of this depends on the rate curve staying where it is or considerably increasing. But let's see, as I say. If it does stay where it is, we should be able to lock in more benefits. That, in turn, should give us a little upside in the GBP400 million that you indicated.

The capital returns question, 13.5% is and remains our capital target. We are not changing that capital target today. In terms of what the Board will choose to distribute at the end of the year, that will be very much a matter of the board at that time and it will be clearly based on the regulatory situation, the macroeconomic situation, the outlook for capital generation over the course of the coming years, and all of these factors, just as it normally is. So, I think the core point here, Alvaro, is that we're not changing our capital target.

As to what Charlie chooses to come in when he's here, obviously, that'll be a matter for discussion with Charlie at the time. And I don't want to second guess that or pre-empt it in any sense. I'll leave that for the day. But I do think it's safe to say that the board has historically recognized, and I've no doubt will continue to recognize, the importance of income and capital return as a key part of our investment story. I'd be very surprised if that fundamental tenet changes.

You asked briefly about M&A. The only comment I'll make there is that our strategy is an organic strategy. Having said that, if M&A opportunities come along that actually adds strategic value or shareholder value in a way that is consistent with some of the tenets that I've set out in Strategic Review 2021, then, of course, we'll look at it, but we don't expect anything major in the near term. But things that make sense, we'll look at.

Alvaro Serrano -- Morgan Stanley -- Analyst

Thank you very much.

Operator

Thanks for that. The next question is from Edward Firth of KBW. Please go ahead.

Edward Firth -- Keefe, Bruyette & Woods -- Analyst

Good morning, everybody. I just have three detail questions and a slightly more fundamental one. In terms of the detail, William, if I heard you correctly, if you look at the hedge run-off, the next three years sounds like substantially less than half of it is running off. Is that right? And is that just because there's a very long tail? Or is it because of the way you structured it that it then becomes quite lumpy after that? It doesn't seem to quite square with a total of GBP2.4 billion and then the GBP400 million and then materially less. So, that was just one question.

The other one was, you mentioned restructuring charges. Could you give us some sort of idea of what you mean by higher? Obviously, looking back over the years, there's a huge gap that higher could refer to. So, just be helpful to get some idea of that.

And then the final question is a sort of, I guess, slightly more longer term one. I think if we look at 2021, it sounds to me like that's a reasonably normal year now. Your provision charges sound like they're going to be pretty normal. I guess capital will be a little bit higher. But I guess, you still [Indecipherable] the hedge to run off. So, net-net, it's pretty normal. And yet, you're targeting, what is it, 5% to 7% return. So, I guess you're not happy with a 5% to 7% return as a sort of -- as people think of that as normal. But what are the big drivers that could make that materially different over the next two or three years, assuming the interest rate environment stays roughly where it is? Thanks very much.

William Chalmers -- Executive Director and Chief Financial Officer

Yeah. Thanks, Ed. Right. On each of those questions, on the hedge profile, it's a very fair question. Essentially, the pressure is reduced in 2022 simply because 2022 has a number of -- a large number of short maturities maturing. And so, the income pressure in 2022, in particular, is relatively modest. As a result, you see the profile that we've kind of called out here, which is 2021, as I've just discussed, we then have a significantly lower tailwind -- sorry, headwind, in the course of 2022, because it's predominantly short-term maturities that come up during that year. That number is likely to increase a little bit further in 2023 as some of the longer-dated stuff comes up for maturity at that point. So hopefully, that gives you an idea, Ed, of that point.

The other points, bear in mind here, is that, over the course of the last year or so, we have typically avoided investing at the short end of the curve, where, frankly, returns have just not been worth investing in and invested a little bit more in the long end of the curve, particularly in the second half of 2020. And so, that's what's given rise to a slightly longer weighted average life in the context of the hedge and a shape that is a little bit less even, if you like, or more elongated than we would have discussed before. That's point one.

Point two, restructuring charges. I won't put a precise number on it, but somewhat higher typically means 10% to 20% in our parlance.

Edward Firth -- Keefe, Bruyette & Woods -- Analyst

Okay, perfect. Thanks.

William Chalmers -- Executive Director and Chief Financial Officer

Third, 2021, normal year, I hope not. I think if you describe a normal year as being one where we have half the year in lockdown, I really hope that isn't a normal year. I think there's a couple of points that I would make there. One is just that. Therefore, when we don't have 50% of the year in lockdown, we would expect activity levels to benefit each of our three main business lines in a way that is proportionate, if you like, to much higher levels of activity.

Second, cost remains an imperative on a BAU basis. We think there are also coronavirus-related opportunities. And then finally, it's also a strategic matter as our technology R&D describes. And so, the cost focus is pretty relentless at Lloyds and it will continue to be so over the course of the coming years.

And then finally, impairment, our through-the-cycle impairment charge is typically 30 basis points, 35 basis points. In fact, I think it's struggled to make those levels actually in the recent historical past. It's typically been lower.

And so, all of those factors, I think, mean that 2021, I would say, is a transitional year and definitely not a normal year.

Antonio Horta-Osorio -- Executive Director and Group Chief Executive Officer

Absolutely.

Edward Firth -- Keefe, Bruyette & Woods -- Analyst

Great. Thanks very much.

William Chalmers -- Executive Director and Chief Financial Officer

Thank you, Ed.

Operator

Your next question is from Andrew Coombs of Citi. Please go ahead.

Andrew Coombs -- Citigroup -- Analyst

Good morning. Firstly, returning to capital return. First of all, there's no mention of buybacks at any point in your report today. Can you just remind us of your thought process on buyback versus dividends and where you stand on that debate?

And attached to that question, the new pension contribution, there's a link with 30% of capital return. Can you confirm that's 30% of dividends and that's 30% dividends and buybacks?

And then, my second question would be on the GBP400 million management overlay. What would you need to see to be comfortable in beginning to release some of that overlay? Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Thanks, Andrew. Again, I'll take those in order. On buybacks, as you know, Lloyds has historically done buybacks. And they remain an interesting tool, I think, at the disposal of the board in situations where they're in surplus capital. The points that I would make there is that the capital position of the bank, as we've discussed, is exceptionally strong, with and without, frankly, regulatory assistance in the form of software or transitionals. There is also alongside of that a commitment to capital return at the board level, which, as I've mentioned before, I think is enduring.

It's clear what the stock price is today. And off the back of that, it's also clear what the benefits of buyback might be. But then, I think at that point, I have to say, it's really up to the board at the end of the year to take a look at the situation with respect to the final part of the ordinary dividend and with respect to any surplus capital return above and beyond that, that it might think appropriate. And I said that will depend upon macro, upon regulatory, upon business performance, clearly, and the outlook at that point. The underlying point, though, is that the board is committed to capital return, buybacks are an interesting tool in the context of the valuations that we're seeing today.

You asked about pensions. The pension commitment is to 30% of in-the-year capital return. And if we did a buyback, that would include buybacks as well as dividends.

It's worth just adding a couple of comments, perhaps, on the pensions point. Why do we think this is an attractive structure? First of all, we think it's fair. It's a fair distribution of excess capital between the company's various stakeholders. Second is it gives us the benefit of less stress capital. And that's because, essentially, we have got now downside flexibility, where, essentially, our pension contributions are derisked. So, as you've seen, we effectively will pay out GBP800 million if the business does not perform. We will only pay out in excess of that as a function of in-year capital contributions.

And then, the final point which I'll make there is that, bear in mind, that term, in-year, and so think about the 2021 capital distribution based on in-year 2021 capital distributions to shareholders as opposed to the necessarily the final year dividend, and do your numbers, if you like, on that basis.

The overlay, it's an important topic, Andrew, and one that, obviously, we have spent a lot of time debating and considering and governancing within the firm. The GBP400 million overlay, as I said, it's an offset to model releases that are otherwise generated by the experience that we've seen. The reason why we have done it is because, essentially, the IFRS 9 model that we take has a set of conditioning assumptions, which are basically the input assumptions around progress of vaccination, around end of national lockdown, around government policy support, that sort of thing. And it takes those set of assumptions and then shocks those and creates a distribution of outcomes around that central outcome, around the central base case. That's a powerful model that produces outcomes that are reliable and something by which we set great store. Having said that, it doesn't accommodate a change in those input assumptions.

Now, if the virus mutates or if the vaccine program is exceptionally slow, doesn't appear to be the case, at least the latter, but if those happen, then that constitutes changing condition assumptions, which is what we're trying to capture with this GBP400 million uncertainty overlay that I've described.

What that means is, in answer to your question, if and as those uncertainties recede, i.e. the vaccination program is clearly successful today -- let's hope it carries on that way -- or the virus mutations appear to be under control or, to a degree, lockdown experience differs from our expectations, then we're able to look at that GBP400 million again and figure out whether that uncertainty overlay is still appropriate at that point. But that's the timing. That's the evidence that we'll need before we take it off.

Antonio Horta-Osorio -- Executive Director and Group Chief Executive Officer

Andrew, just to add a little bit to what William just said, you should put this into the context of what we have been doing over the years in terms of building a low risk bank. And we have discussed this over the years several times. So we want to build, and I think we have built, a low risk, simple bank based on the real economy of the UK. And you have seen the track record that we have in that regard relating to write-offs, when you can go backwards a series of years, and you have seen sustainably that we have had write-backs after those provisions have been made. You see our coverage levels, you see the level of asset growth, so you should include this management overlay, as William described, but you should include it in the broader context that we want to build a prudent bank. IFRS 9 expects you to have an average case. And we think, given the huge uncertainties, we should be on the prudent side as we have been building this low risk, simple bank.

Andrew Coombs -- Citigroup -- Analyst

Thank you. [Indecipherable] company on the first quarter results on the 28th of April as well.

William Chalmers -- Executive Director and Chief Financial Officer

Yes. Was that a question as to whether Antonio will be at the first quarter results?

Andrew Coombs -- Citigroup -- Analyst

For Antonio.

Antonio Horta-Osorio -- Executive Director and Group Chief Executive Officer

Yes, I will be at the quarter one results. So, you still have to bear with me one more quarter.

Andrew Coombs -- Citigroup -- Analyst

Very good. [Indecipherable]. Thank you, guys.

Antonio Horta-Osorio -- Executive Director and Group Chief Executive Officer

Thank you.

Operator

Thank you. Your next question is from Chris Cant of Autonomous. Please go ahead.

Christopher Cant -- Autonomous Research -- Analyst

Good morning. Thank you for taking my questions. I had two on numbers and one on cap gen please. So, other income in the fourth quarter, you flagged this negative one-off from the insurance changes. But I think LDC in previous years has been about GBP300 million a year and you had GBP122 million there in the fourth quarter in isolation. So, it looks to me like the sort of clean 4Q annualized run rate for other income is about GBP4.3 billion. Is that a fair assessment of where you're at at the moment, as we look into 2021 and think about normalization effects of activity?

And then, on costs, your GBP7.5 billion guidance [Indecipherable] GBP150 million allowance for COVID and variable remuneration effects. I think your variable remuneration pool in 2019 was north of GBP300 million. So, are you expecting a further normalization of variable remuneration to be a headwind to cost again into 2022?

Antonio Horta-Osorio -- Executive Director and Group Chief Executive Officer

Yeah.

Christopher Cant -- Autonomous Research -- Analyst

And then, finally, on cap gen. The GBP7.2 billion actuarial deficit is obviously going to be [Indecipherable] capital generation, flagged the headwinds you expect to come from the IFRS 9 transitional unwind, like the RWA inflationary effect coming in 2022. You used to talk about cap gen. You used to give guidance on that. What is your expectation or the level of cap gen in basis points going forward relative to the 170 basis points to 200 business you used to guide us to expect? Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Thanks, Chris. I'll go through them in order. First of all, OI 2021, you mentioned a couple of moving pieces in Q4, and you're absolutely right. We've got a bit of benefit from LDC. We've got a headwind from the assumptions review within insurance. On balance, I think the assumptions review within insurance was larger than the benefit from LDC. And so, that's the way I'd look at it. I won't put precise numbers on that. But in essence, I think the assumption review headwind was bigger than the LDC benefit.

Looking at 2021 OI, it's one of the few areas of our P&L actually that we do not give guidance on. So, I'm going to stay away from changing that. But I will give you a sense as to the run rate as we look at it. And if you take a look at Q4, as we just discussed, you might look at a run rate, not just Q4, but also Q3, once you take account of asset management, market review charges and one or two other things. It's around GBP1.1 billion or at that level. Now, that's in a coronavirus lockdown situation. And as I've said a number of times in the course of our calls, we do expect to see activity recover and benefit OI. How much? I think it's safe to say that, in 2020, we think we lost somewhere around GBP350 million to GBP400 million by virtue of three quarters of lockdown. Now, if we see 2021 experience two quarters of lockdown, we'd expect to get a lot of that GBP350 million to GBP400 million back. So, I think the way that I would look at the run rate for OI is, as said, activity dependent and also investment dependent as we've outlined in our SR '21 pieces here, but importantly, look at it as GBP1.1 billion plus, as I say, the circa GBP350 million to GBP400 million of activity that we lost in a year that, hopefully, has a bit more activity in it than we saw in 2020.

Costs. GBP7.5 billion guidance that we have given. As you say, that does look at the costs, taking account of the headwinds that we'll be seeing from both fair variable renumeration and also coronavirus-related costs. The reason why your math is not quite right is because variable remuneration is built in over a period of time, even though it delivers better outcomes in the first year. And obviously, that then leads to a lagging effect in terms of the building of that variable remuneration build, taking place in the successive years.

Now, at one level, I do hope that variable numeration does go up because it's linked to profitability within the firm. So, if we see improved RoTE and profitability in the firm, that will be a good thing and it will benefit our employees.

Third, capital generation. There are a number of moving pieces within capital generation. And that's part of the reason why we've stayed away from being too categoric. You'll be familiar that the experiences in 2020 around this topic were prone to error, not just from ourselves, frankly, but every bank that reported really.

As we look into 2021, there's a couple of pieces that I think are worth looking at. Historically, as your question points out, we've seen 170 basis points to 200 basis points of capital generation in the past, clearly, pre-pandemic days. And that was associated with a kind of low to mid-teens RoTE. This year, our RoTE, as articulated, is roughly half that. And then, as we've discussed also, we have about half of our dynamic transitions rolling off.

Now, there are one or two other moving pieces that are going on that kind of gives and takes in that equation. But nonetheless, if you take account of those two things, you'll be at least in the right ballpark for 2021.

For 2022, I'm not going to go into. We have given guidance for '21 and not beyond. But I think the building blocks that you've identified, Chris, in your question around RWA movements, for example, around the remainder of the transitionals, for example, are the correct building blocks. And then, you might also add into that both asset growth and also our continued RWA management.

Christopher Cant -- Autonomous Research -- Analyst

Thanks for that. That's really helpful. If I could just ask a clarification on your remarks on other income. The GBP350 million to GBP400 million, you're saying that activity loss per quarter relative to pre-COVID levels, when I look back at 3Q and 4Q of 2019, both pre-COVID, quite clean quarters. You were GBP1.2 billion, GBP1.3 billion. So, if you're GBP1.1 billion in the second half, was the GBP350 million to GBP400 million a quarterly comment, an annual comment or half yearly comments. I just wanted to clarify.

William Chalmers -- Executive Director and Chief Financial Officer

Yeah. Sorry, Chris. I should have been clearer. It is an annual comment, but bear in mind that there were only three quarters of lockdown. So, essentially, what I'm trying to say is GBP350 million to GBP400 that was lost over the three quarters during which we had lockdown.

Christopher Cant -- Autonomous Research -- Analyst

Got you. Okay. Thank you. That's helpful. Thank you very much.

William Chalmers -- Executive Director and Chief Financial Officer

Thanks.

Operator

The next question is from Aman Rakkar of Barclays. Please go ahead.

Aman Rakkar -- Barclays Investment Bank -- Analyst

Good morning, gents. Few questions please, if I may. A couple of points of clarification on NIM. Can I press you just for one additional bit of detail in your mortgage application experience? I think you called out 190 basis points completion experience in Q4, which was in line with your prior kind of applications comments. So, I was wondering, where's your current applications experience? Where's that completing? And if you're able to give us some sense of what you've assumed in your NIM guidance for 2021, that'd be great.

Second one was on hedge. As you're thinking a bit longer term, in terms of your hedge capacity, from what the Bank of England's talking about, there's the historic kind of excess savings inflow that we're seeing. You're set to take a big step higher in the first half of the year, albeit maybe we're opening up a bit sooner than the Bank of England was talking about. You may very well see a significant deposit inflow in H1. How should we think about that affecting your business? Does that free up some additional hedge capacity for you? Or is it a pain in terms of what it might mean in terms of some of your asset markets?

And a question on RoTE as well. Just the 5% to 7% guidance you're giving for 2021, I guess that's a reasonable enough range. I think it implies a kind of GBP800 million net profit kind of range. I was kind of interested in what you see that kind of uncertainty as -- is that around the impairment charge, other operating income or kind of -- that'd be helpful.

That is it. Thanks so much.

William Chalmers -- Executive Director and Chief Financial Officer

Okay. Thank you, Aman. First of all, on NIM and mortgage applications, I mentioned earlier on that we have seen mortgage pricing very favorable and hence the activity that we've undertaken in that market.

The completed mortgage margins that we've been doing, the circa GBP190 million [indiscernible 100:09] as mentioned in my comments earlier on, there's been a little bit of softness in that recently. I wouldn't want to overstate it. But essentially, what's been happening is that five-year swap rates have been going up and pricing has not been keeping pace with that five-year swap rates. And so, you've been seeing a little bit of compression in that mortgage margin. But still, the important point is very attractive levels from both a historic and a return on equity perspective. So, that perhaps gives you a bit of guidance there.

In terms of what we assume, we've assumed a gradual softening in mortgage margins over the course of the year, both as a function of some of the cyclical factors, e.g. the stamp duty ending, and to a degree, we expect that demand, if you like, to be predominantly or rather significantly in the first half. And still there, but dampening down in, of course, the second half. And that then is aligned with our pricing assumptions for mortgages.

On hedge capacity, it's a good point. We increased our hedge capacity this year, as I mentioned in my comments earlier on, but importantly, of the GBP25 billion increase that we took, GBP11 billion of that was from effectively reclassification of our commercial deposits, which is essentially just trying to manage the existing business that we have in a smarter way and make those deposits more stable, and therefore, more eligible for the hedge.

So, of that GBP25 billion increase, GBP11 billion of that was commercial and not related to the deposit inflows that we saw. GBP14 billion was, but contrast that to GBP40 billion of deposit inflows that we saw during the year. So, there's still, as you can see from that, quite a bit of gap that we have not taken into account for our hedge capacity.

And at the moment, while we just try to figure out how that develops over the course of 2021, we're essentially just keeping it on short-dated investments, so that if there is a customer reaction that we're able to respond to that. We don't necessarily expect it. We think many of those balances are here with us per se, but we're not banking it at the moment.

The turnaround for that is clearly -- if they do end up staying and if we do end up in this environment where, frankly, customers have greater precautionary balances in the past, then that does have -- or rather will have implications for our overall hedge capacity. And we'll look at that as we gather more evidence over the course of 2021.

RoTE, as you say, it's a 200 basis point gap between 5% to 7%. And that is deliberate. It is deliberate because we're clearly still in a highly uncertain environment. What are the moving pieces that might take us -- move us around within that gap? I think I would highlight two. One is activity. And we don't yet know whether the government plans will be held to target. We sincerely hope they will. And clearly, the vaccine program is testimony to the potential success there. But there's a degree of caution, if you like, around the speed at which customer activity resumes. If we get more customer activity, we'll be at the upper end. If we get less, we'll be at the lower end.

And the second is clearly impairments. As we've discussed, we are very well provisioned for the uncertainties that lie ahead. We have our ECL modeling. We have where we think the ECL modeling has come up short because of the unusual circumstances that we're in. We have put in place management judgments on top of that, as you can see in our disclosures. That puts us in a very strong provisioning position.

If it turns out that the macroeconomics do not unfold in the way that we have predicted, then you would expect to see some implications for our impairments line and releases associated with that.

Aman Rakkar -- Barclays Investment Bank -- Analyst

Thank you. Thanks, William.

William Chalmers -- Executive Director and Chief Financial Officer

Thanks. Thanks a lot, Aman.

Operator

Thank you for that. We've provided additional time today for Q&A, but still have questions left over. So, the investor relations team will be happy to pick up any remaining questions. The final question we have time for today comes from Jonathan Pierce of Numis. Please go ahead.

Jonathan Pierce -- Numis Securities -- Analyst

Hello. Good morning. Thanks for taking the questions. One for the models, please. The share counts, it was up 786 million last year. But obviously, some changes last year on the staff bonus plan, as you pointed out. Can you give us a sense as to what you expect the share count to go up by this year, please, as you see it today?

Second question. I was wondering if you could give us a little bit more help on the RWA inflation in 2022? Because it sounds from what you're saying [Indecipherable] GBP10 billion to GBP12 billion possibly coming in at 2022. I missed whether you said some of that was credit migration or whether you weren't expecting much credit migration, but maybe -- can you give us a slightly better sense of the components, things like best estimate, expected loss, mortgage risks, like those sorts of things.

And then finally, could you maybe give us a sense as to why the pension deficit hasn't budged at all in three years? I understand the comments on RPI. But there's been some quite big contributions going in over that period and asset performance [Indecipherable] as well. So, what's happened there, please.

William Chalmers -- Executive Director and Chief Financial Officer

Sure. Yeah, happy to deal with each of those, Jonathan. I might slightly defer your first one for fear of getting too precise. But the share count might increase a notch more in '21 versus 2020 off the back of employee compensation schemes. But I will defer that to the IR teams to give you a more precise answer than I will do today.

Second, RWAs, there's a number of moving pieces in 2022. As I mentioned, the bottom line is, as said, we know consensus is around GBP215 billion. And roughly speaking, we are OK with that pending resolution of a number of regulatory uncertainties that are out there today.

In terms of the moving pieces, I won't be too precise. Safe to say that we have a chunk of headwinds from a combination, as said, of CRR2, mortgage floors, in particular, the individual mortgage floors, and then finally, CRD IV things, mortgage model, definition of default, for example, hybrid models being introduced, one or two other retail bits and pieces. Those in total, leading to regulatory headwinds, which are there and are worth pointing out.

Then we have, on the other hand, RWA management and we have asset growth. And those two factors, roughly speaking, cancel each other out. So, it gives you kind of some idea, if you like.

Credit migration is, as we see it right now, predominantly a 2021 phenomenon. So, by the time we get to '22, there's not an awful lot of credit migration left. But obviously, we have to see how all of that fares. And so, one of the reasons we're not being too precise today is because there are not only regulatory uncertainties in the outcome for 2022, but also macroeconomic uncertainties too. And as those diminish, then we'll be able to give you more precise guidance.

One further point I'll make on RWAs, which is sometimes asked of us, is what the impact of Basel 3.1 might be in the near term. And again, I'm not going to be precise on this. But I will say that when we get to 2023, we do not see much impact from Basel 3.1 in the near term. In fact, it's relatively benign for us. And the reason for that is because we're on Foundation IRB approach within commercial, from which we get a significant benefit. So, I point that out because it's a feature, if you like, of the position that we're in.

Finally, you mentioned pension deficit, Jonathan. The pension deficit, as its core, if you like, has gone down since the last triannual. What's gone up is the RPI/CPI conversions, which has added about GBP1.7 billion to the overall pension deficit. So, you're not seeing there a reduction in the total number because you have the core benefit that is reducing and has reduced to about 5.6, offset by the RPI conversions with CPI, which for us matters because we have a mismatch in assets and liabilities on RPI and CPI. And as RPI converges, that costs the pension deficit.

So, hopefully, that gives you some of the detail that you need, Jonathan.

Jonathan Pierce -- Numis Securities -- Analyst

Yeah, that's really helpful. Thanks for all that.

William Chalmers -- Executive Director and Chief Financial Officer

I think that was the last question. So, I just want to say thank you to everybody for joining today. And we look forward to the conversations over the coming days, but thank you for joining.

Antonio Horta-Osorio -- Executive Director and Group Chief Executive Officer

Thank you.

Duration: 109 minutes

Call participants:

Robin Budenberg -- Chair

Antonio Horta-Osorio -- Executive Director and Group Chief Executive Officer

William Chalmers -- Executive Director and Chief Financial Officer

Rahul Sinha -- J.P. Morgan -- Analyst

Guy Stebbings -- Exane BNP Paribas -- Analyst

Alvaro Serrano -- Morgan Stanley -- Analyst

Edward Firth -- Keefe, Bruyette & Woods -- Analyst

Andrew Coombs -- Citigroup -- Analyst

Christopher Cant -- Autonomous Research -- Analyst

Aman Rakkar -- Barclays Investment Bank -- Analyst

Jonathan Pierce -- Numis Securities -- Analyst

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