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Lloyds Banking Group plc (NYSE:LYG)
Q2 2019 Earnings Call
July 31, 2019, 4:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Antonio Horta-Osorio -- Group Chief Executive 

Good morning and thank you for joining our 2019 half-year results presentation. I will talk briefly about our performance in the first half of 2019 before Antonio Lorenzo gives you some color on insurance and wealth. We will then hear from George on the financials and we will have time at the end for questions.

We have delivered strong strategic progress and a good financial performance in the first half with market-leading efficiency and returns. Together, this has enabled the board to announce an interim dividend of $1.12 per share, an increase of 5% on last year. Over the last few years, we have delivered prudent growth in targeted segments while reducing costs and increasing investment in the business. As we said at Q1, economic uncertainty persists, and this is now leading to some additional softness in business confidence while we also observe some weakening in International market indicators.

In this environment, our balanced approach progressing our strategic transformation while being watchful and responsive to short-term risks remains the right one. This resilience is reflective in our 2019 guidance. At the same time, our longer-term guidance remains unchanged. Although, continued economic uncertainty has the potential to further impact that outlook. We remain well-placed to continue supporting customers, help Britain prosper, and deliver sustainable and superior returns for our shareholders.

In terms of financial performance, we have delivered a good result with statutory profit after tax of $2.2 billion, a strong return on tangible equity of 11.5%, and an underlying profit of $4.2 billion. While being selective on growth opportunities has some impact on volumes, the net interest margin remains resilient and is in line with our expectations at 290 basis points. At the same time, costs are down 5% and our market-leading cost to income ratio improved by a further 1.8 percentage points to 45.9% in parallel with increased investment in the business.

We are also maintaining our prudent approach to risk with credit quality remains strong and the net asset quality ratio of 26 basis points remaining inside our full-year expectation of less than 30 basis points. Across the business, we have seen a strong performance from insurance and wealth who are running ahead of the strategic plan. Retail continues to deliver in a tough market, and we have seen challenging market conditions in commercial banking.

We were disappointed to incur a further PPI charge of $550 million in the second quarter led by a surge in information requests ahead of the August deadline. However, we have still generated market-leading returns and built 70 basis points of free capital in the first six months despite the 33-basis point impact of PPI and 11 basis points for IFRS 16. This has resulted in a CET1 ratio of 14% post dividend and further demonstrates the capital generative nature of our business model.

I will now turn briefly to the UK economy. As I have already mentioned, the economy has remained resilient although we are seeing continued uncertainty which is leading to some additional softening in business confidence and in International economic indicators. Consumers remain well-positioned as employment has continued to rise with over 1.2 million more people working than at the start of 2016 and real wages are also rising at more than 1% per year. All of this supports consumption and therefore GDP growth. The impact of the economic environment is, however, felt most keenly by UK corporates. Companies' employment and investment intentions have both deteriorated in the second quarter and PMI surveys suggest lower activity levels across sectors.

We have also seen global gross softening and interest rate curves flatten in the second quarter which is a less supportive environment for retail and commercial banks. Against an uncertain backdrop, we continue to undertake a significant transformation of the group which positions us well for the future.

Over the last few years, we have deliberately reshaped and repositioned the group improving balance sheet strengths and delivering sustainable profitability. The group has a broadly similar-sized color on booking 2019 and it did in 2010 of around $440 billion given our prudent approach. But there has been growth in our targeted segments. Consumer finance, SME, and mid-markets have grown by $22 billion in this period while large corporates and the mortgage group are deliberately lower offsetting this. Risk-weighted assets are down $208 billion halving over the period, and run-off assets which totaled nearly $200 billion in 2010 are diminished today.

This high-quality repositioning has enabled the group to improve returns while reducing risk and releasing capital to shareholders. At the same time, we have implemented a culture of relentless focus on efficiency and costs. This has driven down operating costs from $9.6 billion in 2010 excluding TSB to a target of less than $8 billion in 2019. This has been achieved by taking underlying costs out of the business. Our business as usual cost base was down 30% at the end of 2018 including the impact of the acquisitions of both MBNA and Zurich's workplace pension business.

We have also continued to increase our investment in the business for the benefit of our customers and have committed to more than $3 billion of strategic investment over the course of GSR3. I would now like to spend a few moments showcasing our strong progress to date.

We are now half-way through this ambitious strategic plan responding to the changing environment and transforming the group for success in a digital world. We are already delivering a number of tangible customer and business outcomes against each of our strategic priorities supported by $1.5 billion of strategic investment to date. These successes reinforce our existing competitive advantages and create new ones equipping us to compete more effectively both today and in the future.

As I have mentioned previously, this investment is enabled by our unique business model and market-leading efficiency. These allow us to continuously increase investment in the business delivering improved processes and further productivity enhancements as well as tangible improvements to our customer experience while generating sustainable and superior returns for our shareholders. We see this as an additional key competitive advantage.

I will now look briefly at some successes across our strategic pillars starting with digitizing the group where we continue to spend more than ever before on technology. In the first half of 2019, our technology cash spend equated to 19% of our operating cost base, an increase of more than 20% in the prior period. And over 70% of the first half technology spend has been weighted toward creating new capabilities and enhancing existing ones. As Zach mentioned in February, we have adopted a modular approach to transformation, and we continue to successfully execute against this. It provides benefits to both customers and colleagues as we deliver change quicker, more cost-effectively, and on a more meaningful scale than ever before. For example, virtual assistants are now managing up to 5,000 conversations daily with customer satisfaction increasing by 10 points and 25% of queries handled without being passed to a colleague, a trend we expect to increase over time. We are also significantly ahead of our plan in term of migrating apps to our private club. Halfway through GSR3, we have transformed around 40% of our cost base up from 12% in 2017. We are on course to meet our target of greater than 70% by the end of 2020.

Let me now show you how this investment in digitizing the group is helping deliver a leading customer experience. We have repositioned the business to be a truly customer-focused organization with this reflected in strong and improving customer satisfaction levels. Our net promoter score continues to increase at 5% in 2019 to 65 and by more than 50% since 2011. Our score for the digital channel surpasses this and has also increased by 5% to 67. You'll see shortly these improvements are not just limited to our retail channels. In corporate pensions, we have transformed the customer experience improving our employer NPS from a negative 41 to a positive 52 over the last four years. These scores reflect the unique competitive advantage of our multi-brand, multi-channel model. We are the largest digital bank in the UK with around 16 million digitally active users and 10 million mobile app users, with 75% of products now originated online.

This is complemented by the largest branch network in the UK which we are refocusing to meet more complex and value-added needs such as mortgages, financial planning and retirement, and business banking. The combination of these has also enabled us to deepen customer relationships. We are the largest current account provider in the UK with more than 17 million active current account customers. Most importantly, our overall balances have grown by around 60% since 2014, significantly ahead of the market as a result of our targeted propositions across our brands.

Finally, looking at maximizing group capabilities. As we highlighted in February, we are the only provider to serve all of our customer's financial needs in one place building on open banking with our unique single-customer view proposition. The single-customer view is now available to over 4 million banking and insurance customers and demonstrates unrivaled engagement significantly surpassing early open banking levels and those of stand-alone insurers. We will extend this to more than 9 million customers by the end of 2020 and provide greater functionality, something that Antonio will cover shortly. We also expect open banking usage to increase as new products are added, and we have seen the initial size of this having been the first bank to add credit cards and savings last month. This will be complementary to our single-customer view creating an opportunity to further deepen relationships with our customers.

In addition, we have delivered $10 billion of gross lending to UK businesses in H1 2019 ahead of schedule to meet our $18 billion target for 2019 while we also continue to target $6 billion net lending growth across start-ups, SME, and mid-market businesses by 2020. We are pleased with our strategic execution to date, but we are not complacent and know there is still a lot to be done to achieve our GSR3 goals and therefore success in a digital world.

Delivery will be supported by our unique business model and market-leading efficiency which continuously creates the capacity for increased investment. As I mentioned, this investment drives improvements to both internal processes and customer experience while also delivering superior returns to our shareholders. We have a proven track record of delivery in this regard and I continue to see scope for further improvement.

In summary, the first half of 2019 has seen strong strategic progress along with good financial performance. We have the right strategy for the current environment and continue to invest strongly in the business. The resilience of our business model is seen in the guidance we have given for 2019 which you can see on the slides.

Longer-term targets remain unchanged. Although, as I said earlier, economic uncertainties continue and could impact the outlook. Despite this, we remain well-placed to continue to support our customers, help Britain prosper and deliver sustainable and superior returns for our shareholders.

I will now hand over to Antonio Lorenzo who will talk to you about the significance of the strategic progress being made in our insurance and wealth businesses.

Antonio Lorenzo -- Chief Executive Scottish Widows and Group Director Insurance and Wealth

Thank you, Antonio, and good morning everybody. I am delighted to be here today to tell you about the great progress we are making in insurance and wealth. Our financial performance has been strong in recent years with new business premiums up 72% as through the first half of 2017. This is a result of growth across multiple business lines including corporate pensions and a step up in our health enrollment contributions as well as growth in individual protection. As I will show you today, we have also grown share in other areas that we have heavily invested in and prioritized such as home insurance where our offering has been transformed following free platforming. Given this, new income is up 23% over the same period, more than offsetting run-off from long-standing products.

This growth combined with strong cost control in the period from increased digitization has supported a 58% increase in underlying profit over the last two years. The business is now an increasing contributor to the growth, representing 38% of all the income in the first half of 2019 up 7 percentage points year on year. The business has also upstream around $7 billion of communitive dividends since 2011.

Insurance and wealth is a uniquely positioned, integrated business with a comprehensive proposition across multiple product lines leveraging the group multi-brand and multi-channel model. Since 2015, we have reshaped the business to be leaner and more customer-centric while significantly increasing investment. As a result, we are in a better place to harness the considerable operational and financial synergies arising for being part of the wider banking group.

Looking ahead, we are well-positioned to capture further growth across a number of fast-growing and attractive markets as well as deepening engagement with our customers. I will now discuss some of these areas in more detail.

We see our single-customer view as a unique and unrivaled opportunity to meet all of our customer financial needs in one place. We have already made this available to over 4 million customers and will extend this to more than 9 million by the end of 2020. As you have already seen, customer engagement to date has been strong with over 9 million monthly pension web use and on the same banking products an active engagement around funds and contributions. Looking forward, our intention is to increase functionality to our customers allowing them to have greater control of their financial needs than ever before, including pension consolidation and fund switching.

With approximately 60% of our group pension customers having a multi-touchpoint relationship we see this as a significant differentiated opportunity. Beyond this, we are targeting growth across the board, strengthening our position in multiple businesses. We believe in today's environment for a business division of major financial services group it is quite unique to have achieved above-market growth since 2015 in business lines where we already hold top-five market share positions. And most importantly, with a clear line of sight for further growth over the coming years.

To bring this to life, as I mentioned in February of last year, we intend to increase our share across the attractive financial planning and retirement market. We are targeting 15% market shares in both corporate pensions and individual annuities by 2020 and $50 billion of open book assets under administration growth. Here we have already delivered $20 billion of growth as of July, supported by the Zurich acquisition.

Beyond this, for the first time, I am also sharing with you our previously internal ambitions across a number of other areas leveraging strong growth in both digital and physical channels. For instance, we are increasing our customer reach through the branch network in line with our refocusing on complex needs. With home insurance policies distributed through this channel up by more than 25% year on year and in digital, we are growing more than 40% in the same period.

On back annuities, we continue to be an active participant having decided to enter this market in 2014, although our focus is on pricing with discipline. As a result, we have grown below the market in recent years, opting to distribute surplus capital to the group instead. Despite this, we see ourselves as well-positioned for growth in the future given our lower cost of capital and stronger distribution capabilities.

Turning attention now to two main areas of our financial planning and retirement strategy where we see great growth opportunities. Corporate pensions and our joint venture with Schroders. Our financial performance has improved significantly in corporate pensions since 2015 and is reflective of our recent reshaping of the business. In 2015, we had negative NPS scores and limited position at gross panels. Today, as a result of our focus on enhancing the customer experience, we have significantly improved NPS and we now enjoy full panel coverage. This has been further supported by maximizing opportunities across the group including building relationships with corporates through our commercial banking business. The Zurich acquisition is also a major enabled in this market, significantly increasing our rates to some of the largest corporate pension schemes.

Finally, we are creating a market-leading wealth management proposition for our customers. Its aim is to provide a full-service offering meeting simple and more complex customer needs. We will do this through three lines of business. Firstly, a group branded mass-market offering that we will launch at the end of 2020. Secondly, our Schroder's personal wealth joint venture, and thirdly through providing access to leading wealth management and investment business cast enough capital for our high and ultra-high net worth customers.

Through our partnership with Schroders, we are now able to meet our customer's more complex needs. The partnership brings together Lloyd's multi-channel distribution model and unique client base with Schroders' investment and wealth management expertise and technology capabilities. Looking specifically at the Schroders Personal Wealth, we believe the business is well-positioned to meet its ambition of becoming a top-three financial planning business by the end of 2023. Having established the company in the first half of 2019, Schroders Personal Wealth will launch to the market later this year operating restrictive model with a wide product set. We believe that our best-in-class product offering combined with transparent and competitive fees will be attractive to customers in the growing mass affluent market.

Growth will also be supported by referrals of our Lloyd's customers, with these already up by more than 20% year on year as well as the consideration of inorganic expansion should suitable opportunities exist. And as we move forward, the success of the business will be measured across four key areas, assets under administration, advisor numbers, growth in net new business flows, and increased profitability.

Thank you and I will now hand over to George who will run through the financials.

George Culmer -- Chief Financial Officer

Thank you, Antonio, and good morning, everybody. As you've heard, in the first half we've delivered a good financial performance with underlying profit in line with the prior year of $4.2 billion. Net income of $8.8 billion is down 2% but more than offset by a 5% reduction in costs while impairments remain in line with expectations. Statutory profit after tax is $2.2 billion and down 4% due to increase below the line charges particularly PPI and I will discuss these shortly.

Turning first, though, to net interest income. NII is $6.1 billion and down 3% due to our $3 billion reduction in average interest-earning assets and a margin in line with guidance at 290 basis points. On average interest-earning assets, the movement reflects the continued run-off of the closed mortgage book of $2 billion and the sale last year of the Irish business of $3 billion, both of which are off-set by continued growth in targeted segments including $1.4 billion in Motor Finance and $0.8 billion in SME.

On the margin we have again seen a reduction in asset margins offset by improved liabilities and I would expect this to continue in the second six months and for the full-year margin to be in line with guidance at around $290 billion. In terms of asset margins, we're not seeing any real change to the trends that we have set out previously. In mortgages, as you know, the market remains very competitive. Most recently, we have seen a slight improvement in new business pricing but also a slight pickup in SVR attrition to around 15%. And the overall mortgage market margin has remained resilient at 1.8% and in line with the second half of 2018.

In consumer finance and commercial banking, margins are obviously at higher levels than mortgages and similarly remain resilient at 6.7% and 2% respectively driven particularly by growth in SME and Motor. On liabilities, the margin has also remained stable at around 0.5% and we continue to target growth in high-quality current accounts which are up $1billion on the start of the year and $3 billion on the prior year. We've also continued to run down tactical deposits which at$17 billion are down more than 10% in the last year.

The growth in current accounts has also increased our hedge capacity though we've stepped off heading in recent months given market rates. We're currently around 90% hedged with a balance of $172 billion and a weighted average life of around three years. This compares with $180 billion at around four years at the start of the year. It means we now have about $13 billion of hedge capacity which compares when rates offer better value which provides additional flexibility.

Turning then to other income. Other income is $3.1 billion and in line with recent years, though Q2 is down on the equivalent period last year due to higher levels of financial markets activity in commercial and higher central gains in 2018. In terms of divisional performance, you've just heard from Antonio the excellent progress made in insurance and wealth, which is up 21% led by new business in workplace planning and retirement which is up nearly 50% on a much-improved general insurance result. Elsewhere, other income in retail was down 4% to $1 billion with higher current account fee income offset by lower Lex fleet volumes while commercial fee income was disappointing in a challenging market and down 13% as a result mainly of depressed markets activity and the strong performance in Q2 last year. In the center, gilt gains totaled $181 million in the first half down slightly on the prior year's $191 million. Going forward, while we continue to have gains on the portfolio, I would not expect to realize further material amounts this year. Finally, operating lease depreciation is down 5% on prior year though marginally up in Q2 due to a slight reduction in used car prices.

Turning to costs, as you've heard our relentless focus on costs is a significant competitive advantage for the group and particularly so in the current operating environment. Total costs in the first half were $4 billion and down 5% with a 3% reduction operating cost and a 44% reduction in remediation. The lower operating costs are driven by a 5% reduction is BAU with our property marketing and staff costs offset by a 3% increase in investment-related spend as we continue to invest in the business.

And on investment, the above the line cash spend in the first half was $1.3 billion and included $0.6 billion of strategic spend as we remain on track for our more than $3 billion target by the end of 2020 and around 60% of this $1.3 billion spend was capitalized which is in line with previous periods.

Going forward, there remain further opportunities to reduce costs and I continue to expect operating costs to be below $8 billion for this year and for the cost to income ratio including remediation to be in the low 40s as exit 2020.

Looking now at credit. Credit quality remains strong reflecting the group's ongoing prudent approach to risk and provisioning and a high-quality low-risk loan portfolio that is well over 75% secured. For the full year, we continue to expect the net AQR to be less than 30 basis points. In the first six months, the gross and net AQRs are up 7 and 6 basis points respectively at 34 and 26 reflecting a number of items including the alignment of Lloyd's and MBNA credit card approaches, slightly softer used car prices, and a small change in methodology and motor finance while there are also two individual names in commercial banking. In terms of actual experience, we are not observing any changes and new to arrears for mortgages and credit cards both remain low.

On balances and coverage, stage three balances are in line with the start of the year at 1.9% of the portfolio while coverage fell slightly to 23% largely due to some balances in the commercial entry in stage three where we do not expect to incur significant net losses. Stage three balances and coverage within the mortgage portfolio are both in line with year-end at 1.7% and 14.7% while the other products in retail have seen stage three come down slightly to 1.8% but with coverage maintained above 50%. Across the group, we've maintained a total balance sheet provision of $4.4 billion which compares with expected normalized cash write off for the full year of around $1.2 billion and again unchanged from the last couple of years.

Looking next at statutory profit. Restructuring costs were $182 million in the half and mostly comprised severance, the completion of the MBNA integration, and non-branch property costs. These are down over 50% on prior year mainly due to the completion of the ring-fencing program and significantly lower MBNA spend.

Volatility and other items are $465 million and include the costs associated with changing asset management provider, fair value and amortization costs of $169 million, as well as $85 million of negative banking volatility compared with a $250 million gain last year. The PPI charge of $650 million includes $550 million in the second quarter and I'll cover this in a moment.

The effective tax rate is 23% and slightly lower than our expected long-term rate of around 25%. This is despite the PPI charge and due to the one-off release of a $158 million prior year deferred tax liability in the second quarter.

Finally, our statutory return on tangible equity at 11.5% is a strong return but it's clearly been impacted by the below the line charges and we now expect ROT for the full year to be around 12% and slightly below our original guidance.

On PPI, this is obviously disappointing to again be reporting another material charge. Process complaints have been just above our provision at 14,000 per week. However, in the second quarter, we've seen a significant increase in PPI information requests or PIRs which are the first stage in the CMC complaints process. Previously, we've received around 70,000 PIRs a week of which around 9,000 or just 13% eventually resulted in a complaint. In Q2 the number of PIRs increased to around 150,000 per week and is now running at around 190,000 partially offset by deterioration in quality and our lower complaint conversion rate of around just 10%.

In our numbers, we've assumed that PIRs stay at this elevated level of around 190,000 and of slightly lower quality through to the industry deadline at the end of August. The impact of these additional volumes equates to around 200,000 extra complaints over and above our previous assumptions. This accounts for almost three-quarters of the $550 million in increase with a balance comprising slightly higher costs per complaint and higher related administrative expenses.

Turning then to the balance sheet. Loans and advances of $441 billion are stable on Q1 with growth in targeted segments including $0.8 billion in the open mortgage book where we've delivered growth in a competitive market while maintaining our overall margin through the selective targeting of segments including our branch originated sales. For the full year, I still expect the open book to close 2019 in line with 2018. Elsewhere, as you've heard, SME is up $0.8 billion on the prior year and continues to grow ahead of the market. We continue to target growth in our high-quality consumer portfolio where Motor Finance is up $0.9 billion in the half.

Finally, RWAs are up $1 billion on the start of the year at $207 billion as a result of the implementation of IRFS 16 although down $1 billion in the quarter as we continue to optimize the business mix, particularly within the commercial division. Looking forward, as you know, the number of RWA changes coming in 2020 and beyond, while there are still a number of moving parts we now expect the 2020 regulatory increase to be toward the top-end of the $6 billion to $10 billion range we've spoken about previously. The impact of which, though, is included in our free capital build guidance of 170 to 200 basis points per year.

Turning then finally to capital. As you know and have heard, the group has built 70 basis points of capital in the first half. Underlying capital build remains strong with 97 basis points from banking operations and 5 points for the interim insurance dividend offset by the 33-basis point impact of PPI and 11 from IRFS 16. This strong capital build has enabled up to pay an interim dividend of 1.12 pence up 5% on last year. And as we announced in May, we'll be moving to quarterly dividends beginning in Q1 2020.

Going forward, we are maintaining our ongoing guidance of 170 to 200 basis points of free capital build per year. But in 2019, as you've heard, we would now expect to be the lower end of this range due to the below the line charges. Finally, as you heard at Q1, the group has a capital target now of around 12.5% with a management buffer of around 1% with a 50-basis point reduction from the previous target coming from the lower systemic risk buffer and pillar two A requirements.

So, to conclude, in the first half of 2019 we've made strong strategic progress, delivered good financial performance, and increased the interim dividend by 5%. In the current environment, our strategy remains the right one and you see this in the resilience of our results. For the full year, we expect the margin to remain at around 290, operating costs to be below $8 billion, and the AQR to be less than 30. These will support capital build at the lower end of our 170 to 200 basis point range and the statute return on tangible equity of around 12%.

For the longer-term, we are maintaining our targets although as said continued economic uncertainty could impact the outlook. We remain, however, well-placed to continue to support customers, help Britain prosper, and deliver sustainable, superior performance.

And that concludes my presentation. We've now got time for Q&A.

Questions and Answers:

Antonio Horta-Osorio -- Group Chief Executive 

Shall we start here? Jason?

Jason Napier -- UBS -- Analyst

Good morning. Jason Napier at UBS. Two questions around the net interest margin, please. Firstly, we've seen in the market improvement in credit spreads on flow mortgages, but you've already mentioned the impact of increased SVR attrition on the back book. So, anything you could say about what open book growth and that sort of behavior means for forward credit spread income for the business. And then secondly, just to focus on the contribution of the hedge if we could. I appreciate you've reiterated guidance for funding for this year and next but clearly the yield curve is less helpful than it was. So, any color you could give around the contribution headwinds that you'd face if the yield curve stays here. There's an intense interest in maturity profile at the existing positions. Thank you.

George Culmer -- Chief Financial Officer

I'll deal with the second one first. The structural hedge remains a fundamental part of how we do business and I think we've been very clear over the years as to what our strategy is and I think we're very clear in terms of what the contribution is. My expectation is as we go forward that will remain the case and you were seeing today in terms of just our balance sheet numbers. First up, the continued focus on the high-quality current accounts and the hedge able balances. That's very much where our focus is and that's very much at the core of the structural hedge as part of our business. That will continue.

In terms of specifics, look. We're in a different place from a year ago and we're in a different place in terms of market-implied rates, five-year rates in particular and what that might mean for us. We still, though, think that we are in a strong and a protected position and that is the sole purpose of the structure hedge in terms of bringing that stability to earnings. And as an example, just for people to calibrate off, if one was to take the current market implied around about 70 or whatever, you would look at that in terms of impact in terms of year on year structural hedge contribution of reducing that by something like around about the $250 million mark. That's the sort of equivalent number that you would see if you applied current market implied.

Why that number? Well, it's all obviously linked up to things like the run-off profile and the maturity of the structural hedge. If we look out over the next 18 months or so, we have about $10 billion of the structural hedge maturing in the second half of this year and about $30 billion maturing as I go through 2020. So, I'm not looking into any cliff event in terms of that structural hedge composition and as I said, it's about $40 billion over the next 18 months or so. And in the context of a $172 billion currently deployed, theoretically deployable $185 billion you need to see that in context of hedge that's delivering whatever it is, $2.6 billion, $2.7 billion per annum. So, very much remains our focus. We will continue to target our balance sheet strategy so that we can contribute to that structural hedge. I think we've been very clear on what our strategy has been, and it will remain a very resilient part of our income even if today's rates and all that sort of things play out. So, it remains a core part of what we do and it's a key part of us underpinning our confidence.

To the first part, flow mortgages. Yes. Look. Over the last couple of months, things have gotten slightly better in terms of the mortgage market simply through, again, what's happening on those swap rates and the non-parsed in through of those into customer pricing. So, that is a welcome sign and a welcome change. Do we sit up here and call a change in the market or a change in material profitability? No. We're still looking at if we came in around about 1% new bids, you're up to 115 etcetera. That's still to come through in terms of completions and that still compares to a back book of around $1.8 billion. But again, I think you've seen from the slide I presented in terms of the evolution of that overall margin that we are very active in terms of retention strategies and retention policies which are hugely important to us. We are also hugely focused in terms of, again as I said in my presentation, targeting parts of the market that we think are more valuable to us. We prefer first-time buyers. It's part of our helping Britain prosper commitment. We also see greater value there vis-à-vis refinance.

We're also more interested in things like retention which again is more attractive to us. We're more interested in things like growing our branch market share which is up about 2% or 3% year on year which is great evidence of us deploying branches for sales and more complex products. So, we see that as a big positive. Overall, our share of mortgages in the first half was something like 17% versus 16% last year and I think things like the pipeline, I'll get this stat wrong, is something up like 20% or whatever from where it was on the equivalent period last time. So, you know what our strategy is. Things have looked a bit better. We're not going to call a turn, but we're also not going to call it a strategy. Then going back, I think you did ask, we do remain confident of closing this year, as I said in my presentation, in terms of that open mortgage book in line with where we started the year.

Jason Napier -- UBS -- Analyst

Thank you.

Antonio Horta-Osorio -- Group Chief Executive 

Additional questions? There were a few here. Great. Can we have the microphone here, please?

Ray -- Bank of America Merrill Lynch -- Analyst

Hi, good morning. It's Ray with Bank of America Merrill Lynch. If I could just follow up on the mortgage book, please. The SVR book contraction has accelerated materially in the first half of the year, so down $8 billion in the first half is a 22% annualized contraction. Just wondering if you could split that between Q1 and Q2 if there's been any step-up in any particular quarter? And clarify what the rate that those customers are refinancing away from? And then secondly on gross lending, a pickup in the open mortgage book in the second quarter as you guided to. I think you did $8.7 billion of gross lending in Q1. I'm curious as to what that was in Q2. And then just on the competitive environment which as you say the swap rates benefited new business spreads more recently in the first half of the year. It looks like in the last couple of weeks a couple of your competitors have cut pricing. I was just wondering if that's something that you've observed in the market.

George Culmer -- Chief Financial Officer

In terms of the last one first. Look. In terms of activity over the last couple of weeks, it sort of doesn't surprise. This came back to Jason's question. I'm not going to call anything. It stays competitive and over the course of this year you've seen different people doing different things. You can try and divine motive and are they doing something very clever or are they doing something very stupid? Is this influenced by surplus liquidity or is this influenced by a land grab? It's just part and parcel. So, I wouldn't read into anything that --

Antonio Horta-Osorio -- Group Chief Executive 

As we've been telling you over the meetings we have been having, people have different behaviors over quarters. I don't think I would call anything, particularly in the last three weeks. Maybe some people in some products have lower prices. On the other hand, you have people exiting the market like Tesco Bank for example. You have other competitors staying on their calls. They will be more mindful about margins and volume. I don't think the last two or three weeks have any difference to what you saw in the last eight weeks which is an improvement as George said on spreads and we have taken a larger share during that period which is already to be completed in the books. So, the open-end mortgage book will continue to increase as George said.

George Culmer -- Chief Financial Officer

And then to your other questions. In terms of the sort of reverse type book, the attrition ticked up to about 14.8% toward the back end of Q2. The equivalent of that, I think, in Q1 was about 13%. So, we have seen a slight pickup. Some of that was actually due to being low maturities into that book, but I probably would expect if I was picking a number for the full year to be around about that sort of 15%. You're right. The total book is now about $94 billion compared with about $104 billion at the start of the year. Within that, the Halifax, which is the main one in terms of price is up about $33 billion and that's down about $5 billion in the year. But again, the actual attrition rate is actually irrespective, it seems very sort of agnostic to actually rate charge. It's pretty consistent in terms of across the pieces.

In terms of mortgage volumes across the piece, I think in Q1 we were looking at the gross end of about $10 million and that's grown to about $12 billion in the second quarter. So, you've seen that pick up and that's consistent with what we've been showing you in terms of Q1 versus Q2. I think as we said, the start good in that mortgage evolution we knew that was a big redemption. So, that took the book down which we sort of expected in Q1. But you are seeing that pick up and as I said the APS pipeline looks strong. The one I don't have a number for though is in terms of what people are moving away from. I would imagine UBS's spreads aren't particularly different from the ones that we've talked about in terms of the Lloyd's book.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Thank you. It's Guy Stebbings at Exane BNP Paribas. The first question was just on the credit card strategy. The balances I think were flat on the previous quarters but down about 10% since Q3 last year. Is the strategy still to grow that book? And a follow-up question there. I saw a pick up in unsecured impairment rates. If you look at the trust data, which doesn't include MBNA, there wasn't a sharp move in terms of new MPL formation. So, is it fair to assume it's MBNA which is seeing a slight pick up in impairments?

That was the first question. Do you want me to give you the second?

George Culmer -- Chief Financial Officer

That was two questions.

Antonio Horta-Osorio -- Group Chief Executive 

There were two questions.

Guy Stebbings -- Exane BNP Paribas -- Analyst

The second one was just on guidance around capital generation for the second half of 100 basis points. If you reflect on tangible growth, pension contributions, AT1 coupons, things like that, it looks like you're guiding for profit after tax of about $2.6 billion, $2.7 billion. I think it's a little bit below that. Or are you expecting RWAs to actually be down in the second half of the year sort of to help contribute there? Thanks.

George Culmer -- Chief Financial Officer

Okay. On that last one, we are looking at continued RWA optimization. Without being this a comment on your back solved PAT, just as an input to your calculations, we are looking at RWA optimization. We did a bit of that in the first half. I would expect to do more of that in the second half. That would be particular things like the large corporate business more reactive in terms of returns and efficient use of capital etcetera. You've heard us talk about that over the last number of years and we certainly have some actions that we would be hoping and expecting to take in the second half of this year. So, I would expect to see that.

The unsecured, the MBNA, there's a number of things. No, part of it, actually, I've got a sort of slight model change where actually I've now aligned MBNA's IFRS 9 numbers to the Lloyds. We were basically using things like Lloyd's PDs on them before and we've aligned the collection procedure. So, there's about a $40 million step up which simply comes from a methodology alignment and isn't actually relating to underlying experience.

And then in terms of current strategy. Look, prior to MBNA we were underweight and we were looking to grow market share. It was an area we liked. We wanted more of. So, it's probably fair to say we were slightly more aggressive in terms of our approach to that market. We're now where we want to be and it's about pursuing what we think is the most successful strategy for that particular part of the market. In that, you've seen the most obvious bits are coming in on things like balance transfers where you've seen a material reduction in the terms offered and the period of free periods as part of the product design. So, you have seen a slight shift in terms of before and after the MBNA deal. It's about deploying what is what we think is the most successful strategy for that book. We would expect the market to be growing 2% or 3% and we will be there or thereabouts I would have thought.

Antonio Horta-Osorio -- Group Chief Executive 

The market has been decelerating lately on credit cards and we should be more or less in line with the market. There's no change of strategy. We are very pleased with the integration of the MBNA completely aligned and integrated by now with a final ROE of 18% versus 17% we thought at the onset.

Andrew Coombs -- CITI -- Analyst

Good morning. Thanks. Maybe just one follow up on the hedge and then two separate questions. Just to finish off on the hedge, I think in the past you've discussed as your unhedged capacity rises there is a chance of picking up a capital charge as your hedge position moves. Are we expecting something like that in the second or not really?

Antonio Horta-Osorio -- Group Chief Executive 

No.

George Culmer -- Chief Financial Officer

No. Look, we don't. You're right. If you take it to extremes, then you're at the mercy of stress tests and all those sorts of things. 172 plays 185 at the moment. You're at the margin. We've seen in terms of reinvestment and in terms of actions that we take, we don't see that there is value there. We don't see what downside is being protected. So, we've stood off. But it's not to the extent to which I think I'm going to endanger the capital position which is not to the extent which we are going to endanger the capital position.

Antonio Horta-Osorio -- Group Chief Executive 

And the latest numbers we have, we are growing 5% as of May versus the market which is growing 3%. So, we keep growing above the market 5% to 3%.

Andrew Coombs -- CITI -- Analyst

And then, maybe just two separate topics that we haven't talked about. Firstly, obviously, this is maybe a strategy question, but the revenue environment is quite challenging now for the whole industry and this wasn't what you were planning on when you laid out the medium-term target. So, I think you've delivered a very good cost performance again in the first half, but I always go back to you already start with a very efficient cost position. So, what more can you do? What other cost levers that you would look to pull? Are you going to start to rethink some of the investment that you've guided to or is there something else that you can point to 10 years now? Where else can you take costs out, I guess?

Antonio Horta-Osorio -- Group Chief Executive 

That's a fair question but you will admit it's fair as well that I have been hearing that question for five years. So, I think that question splits into strategic and operational. From a strategic point of view, I'm a strong believer that you need a culture of attention to efficiency and costs in order to be able to relentlessly implement a reduction in BAU costs. Number one. And number two, strategically as well, I think you should manage your BAU cost base with a second eye on quality. So, you have a BAU cost space. You have to look at quality because you could potentially cut the wrong costs. And thirdly, you have to look as you correctly pointed to your investment capacity. So, are you making your company more efficient but at the detriment of quality or at the detriment of investments? While NPS scores we have shown you. They increased 50% over the last eight years with another 5% increase this year both on the multi-channel approach and also on the digital channels, which are slightly above the remaining channels.

And in terms of investment, we have stepped up the investment, as George showed. We are exactly in line with what we thought at $1.5 billion now at mid of the plan. And I have no intention whatsoever of cutting the investments which we could, as you say. But I don't think it makes any sense to cut the investments except in two circumstances. Either if the investments don't deliver the forecasted benefits, and we are on the plan as we showed you and very excited about all the benefits we are getting. We try to show you the results of that. For example, after three years in the insurance area and with the plans that we have for the wealth business. Secondly, if there is a material discontinuity.

So, of course, if there was to be no-deal Brexit and there is a discontinuity and the paybacks of those investments instead of three or four years become 10 years. Of course, we could lower the investments. And it is true, as I just said, that we have $1 billion of discretionary investment every year which about half is immediately expensed or all of it goes out of dividend capacity, as you know because everything which is intangible reduces from the dividend capacity. So, we have a big lever there, but we have no intention of cutting those investments because they are delivering, because still the scenario most likely and the one the government favors is another leave Brexit. We are seeing the results of those investments and we're not feeling any pressure to do anything differently. So, we are not going to cut those investments, but it is true to your question we have that lever should there be a discontinuity.

Andrew Coombs -- CITI -- Analyst

Thank you. I did have one more question if that's OK on the fee income outlook. You can see the current account fees are down half on half despite there are higher balances. I was wondering if you could talk a little bit about where the pressures are coming from? Are you seeing any pressure from the overdraft regulations as well? If you could give us a number that way we can --

George Culmer -- Chief Financial Officer

Okay. Well, if I step back. I mean on the whole sort of OI, at the start of this year we talked about having an aspiration to the target being in line with last year's $6 billion or so. We reaffirmed that at Q1. There was a lot of questions on that. That is still our target. Has it got a bit tougher? It has got a bit tougher to achieve. And we'll see how the second half of the year plays out. But that was our sort of aspiration and that stays the aspiration, but it has got a bit tougher. Within that, what's going on -- I know you asked specifically about the sort of retail bit but when you look through the numbers and in terms of the H1 experience, retail is doing a tough job in a pretty tricky circumstance. It's down prior on year but I've taken action in terms of fee charges. I'm seeing a slight benefit from things like ATM reciprocity which has been going against me. I've done some internal changes in terms of commission payments between retail and insurance which have impacted retail as. They are slightly down, and it will stay pretty tough there.

Commercial, which is down around about 13% is probably down more than we expected, to be fair. And that is a more challenging market environment. And in terms of people stepping off activity, you see it in the indicators. You see it in the comments and you probably hear it talking to businesses. So, there's no doubt that is slightly worse than expected. At the same time, again, going back to what you've seen and heard from Antonio and on the slides, insurance has been the standout. And in OI to be up 21% is a tremendous achievement and I think that result is very reflective of the change and the success and the building of that insurance business.

So, for the full year, as I said, targeting close to 6 was the aspiration. It stays there. It has got tougher for the full year. I would expect retail to be sort of much over muchness. I would expect insurance to continue to show a strong result. It's not going to be 21% but I would still expect it to be good daylight between 2019 and 2018 and I would be hopeful that within commercial that we can claw some of that territory and some of that ground within the commercial.

Andrew Coombs -- CITI -- Analyst

Thank you. That's very helpful.

Antonio Horta-Osorio -- Group Chief Executive 

Joe?

Joe Dickerson -- Jefferies -- Analyst

Joe Dickerson from Jeffries. George, I think at the full year you gave us the unrealized gains on the gilt and the liquid assets portfolio. If you could give us a sense of what those unrealized gains might be as of H1, that would be great. And then secondly on liquidity, I just note that your liquidity coverage ratio is at 130% and your cash is up 8% year to date. Presumably, like other banks you've been having to hold higher liquidity because of uncertainty in the environment. I guess, could you quantify how much of a drag that has been to the net interest margin? Because it seems to me like on the other side of all of this next year there could be quite a tailwind on the liquidity side to the margin.

And then lastly, do you still intend to distribute capital down to 13.5%?

George Culmer -- Chief Financial Officer

Okay. The carry cost, the excess liquidity, while I'd like to say there's a massive opportunity there, a massive prize, I haven't got precise in my head, I don't think it's a big drag on the numbers. And we have not been required to or asked to do anything as regards that. As you might expect, going back to 31 March type Brexit, we sort of took the opportunity to get ahead in terms of funding. If markets were open, then we thought we would access them and take advantage of that. So, when I look at what we've actually done over the last 15 months versus original plans, we've accelerated and brought forward. I think that was the sensible thing to do. And that kind of remains our overall stance, but I don't see that there's a massive prize in terms of the NII in terms of the carry cost there.

The unrealized gains, if this number isn't right, we'll round it but I think it's just shy of about 200 million quid is the number that's in my head. If that's wrong, well I'll get Douglas to do some work and ring everybody up. That's what he's here for.

On capital, look. Nothing has changed. You're not going to expect me to say anything different from what I'm about to say, but nothing has changed. We were pleased to get the reduction in the capital requirement because we believed it reflected real de-risking of the business both from the pillar 2A perspective and things like contributions to pension schemes and to earlier questions around hedges and things like that. And in terms of scale and size of the ring-fenced bank. So, we were very pleased with the reduction because we thought it reflected the actions that we had taken. So, we're pleased to see that, but the policy has not changed. You've seen our interim dividend which will be sustainable and progressive, and you've heard these words before but the board will make their decision at the end of the year which is the right time after we've completed stress tests. After we've completed plans for the subsequent years in light of the information pertaining to that period in terms of what they do with the surplus over and above the requirement of 13.5%.

Joe Dickerson -- Jefferies -- Analyst

Great. Many thanks.

Antonio Horta-Osorio -- Group Chief Executive 

Chris?

Chris Manners -- Barclays -- Analyst

Good morning. It's Chris Manners from Barclays. Just three questions if I may. The first one was just back to Jason's on the capital. 170 basis points of capital generation, that's about $3.5 billion looking at where the RWAs are. 50 basis points drop in your requirement is another $1 billion. That looks like about $4.5 billion as sort of surplus. If we look at what you've indicated with your interim dividend, that actually looks like you've got buyback capacity of well over $2 billion. Just trying to think about is there anything apart from the hard Brexit that we should be considering to stop getting to that sort of level for next year?

The second question was just about the yield curve. Clearly, a moment in the curve is pricing potentially different outcomes. It does look like there's going to be more than a 50% chance of a rate cut over the next 12 months. How should we expect you to be able to react to that? Can you de-churn some of the pricing on the tactical deposits more? How would your deposit be inverse work? How much can you sort of take out of that managed savings book? It would be interesting to think about that.

And the last point was on asset quality. So, the gross AQR, obviously, jumped up a bit in the quarter 38 basis points. I know you flag those sort of a couple of big corporate defaults in there. How should we think about that gross AQR trending? Should it glide down a little bit from here? Thanks.

Antonio Horta-Osorio -- Group Chief Executive 

On the second point that you mentioned, just to be precise, what George said, George gave you an extrapolation of if the curve stays as it is what happens in 2020. That is without any management actions. So, as you said, depending on the scenarios, we will be taking management action as we take all the time. As we took in the first half versus the second half. I mean, it's our job, right? And don't forget that we look at the balance sheet holistically. We always look at the margin as the asset prices minus liability prices. We look at it by segments. We manage it on a weekly basis. And that has proved a competitive advantage. So, I just want to emphasize the point that depending on the scenario and if that happens, we will see what we can do. We have had in the past scenarios like that and we took action. We will be taking management action. So, I wanted to reemphasize that George's extrapolation assumes no management action so that you have a sensitivity which is important in terms of should the curve stay as it is as today what happens in 2020. But that's without management actions.

Do you want to comment on the credit?

George Culmer -- Chief Financial Officer

On the gross bit, what we've guided to is below 30 this year and whatever the number is of the planning period around 30 or something like that. We've also said there will be a lower level of writebacks and releases, although we would expect to see a continuation. It will be a lower level which would guide you into sort of a few basis points above. Sort of to your question, this time's result has been to sort of -- those two commercial names we talked about probably added about 5 points to the gross. So, that there they sort of give it a little spike to your question that are distorting the trends. It can happen at any time and all that sort of thing. I give out that warning, but that's the sort of distortion to the six-month number.

Antonio Horta-Osorio -- Group Chief Executive 

And then just to clarify, Chris, they are defaults. They are just additional impairments we decide to take. Those are not two defaults. They're just two additional impairment charges on two different names we decided to take prudently. They are not default, just to be precise.

George Culmer -- Chief Financial Officer

Yeah.

Chris Manners -- Barclays -- Analyst

In stage three or stage two?

Antonio Horta-Osorio -- Group Chief Executive 

Yes. Stage three.

George Culmer -- Chief Financial Officer

Antonio has talked about the rate cut and how we've responded. We've responded before. I think you will expect to see us respond again in terms of taking appropriate action in terms of product pricing. And thereafter, to Antonio's answer on cost and all those sorts of things as well, we would look across the business in terms of what we might or might not do.

Antonio Horta-Osorio -- Group Chief Executive 

And your question on capital, as George said, the board policies are unchanged. I think we have a prudent dividend policy. So, the ordinary dividend grows, as we told you before, in line with nominal GDP. So, we increase it 5%. But the board at the end of the year post-stress test plus post-PRA buffer, with all the information available yet in a fair way, as usual, will take the decision. Our target is around 12.5, that's around 1% and we will decide what we will do with the excess. That is exactly the same procedure as we have been doing in previous years. There is no change whatsoever.

Chris Manners -- Barclays -- Analyst

Got you. Thank you.

Unidentified Analyst -- Analyst

Good morning. Just a very quick couple of questions on insurance. Are there any CMI related releases in the results the first question. Second, on the substitute ratio, the 149% again, the 10-year swap has come down since then Q2. So, I'm sure it's the case that you still no impact on your growth aspirations in terms of the risk problems that you're doing. And just the final question on bulk annuities and the growth have looked just keeps getting better and better. Will you be looking to change your reinsurance strategy to perhaps grab more market share?

Antonio Lorenzo -- Chief Executive Scottish Widows and Group Director Insurance and Wealth

Well, let me start with the latter. I think in terms of, as I said in my presentation, we are managing bulk annuities with a discipline in pricing and we don't have any issues. We have the right; we see the right pricing in the market and the right proposition to go to head subject to the capitals. But the thing is we don't have any, we don't see any issues, as I have said. I mean, the returns are OK. Where we are heading now that the people are looking for growth. This is an opportunity for growth for us as many others that we have in the portfolio.

In your second question was...

Unidentified Analyst -- Analyst

On CT1 ratio came down because...

Antonio Lorenzo -- Chief Executive Scottish Widows and Group Director Insurance and Wealth

Well, I think that really there are different impacts in the capital ratio we have the equity, we have the interest rate, the credit. Obviously, interest rates are hitting us, but there are other things that we are doing in terms of reducing the risk and we have some changes in the models that we are managing in order to be in the right place with the capital. So, we are obviously this has an impact but we are doing other actions. We are taking other actions in order to be above the 140.

Unidentified Analyst -- Analyst

That's correct. Follow up and I ask you what kind of actions is it? Expenses?

Antonio Lorenzo -- Chief Executive Scottish Widows and Group Director Insurance and Wealth

Well, we have a lot of opportunities to manage longevity because certainly, we are probably in terms of the competition, most of the people have a lot of longevity hedged. We are keeping a lot of everything longevity in a good way, but I think that this is an opportunity always to manage capital as we have seen other's doing. Okay.

Antonio Horta-Osorio -- Group Chief Executive 

Shall we go to this side now, Fahed?

Fahed Kunwar -- Redburn -- Analyst

Hi. It's Fahed Kunwar from Redburn. Sorry to come back onto NII. It just feels like its two quite big shifts here. So, I think in the strategy there you had structural hedge income increasing as a portion of revenues that are coming, a larger share of revenues. Obviously, you had one rate rise in per annum. We're looking at flat or rate time and stop rates where they are.

So, I understand the $250 million guidance, but the flat margin guidance is predicated on those assumptions. What would need to happen for that flat margin guidance to change? How would margins come down from here considering those two materials shifts potentially aren't adjusting that guidance? So, just some flex and understanding what kind of economic environment we would need for that flat margin guidance to be challenged would be helpful.

And on the second question on ROI, I understand the $6 billion for this year is difficult, but the insurance growth is very, very good at the moment, and other operating income?

Antonio Horta-Osorio -- Group Chief Executive 

Yes.

Fahed Kunwar -- Redburn -- Analyst

When should we start expecting growth in that line? So, when should the insurance kind of benefits start to offset the impacts from retail and commercial? Thank you.

George Culmer -- Chief Financial Officer

Yes. That's a good question. Look it's been tough for different reasons, in different parts of the market. And we've talked to this year, as I said to an answer to an earlier question of approaching targeting, $6 billion. I will be cautious about giving any longer-term guidance. The number of uncertainties out there are huge. I will try and reassure you that we are doing things in each of those individual businesses in terms of generating the topline. You've seen the evidence insurance today.

Within retail, in terms of some pricing actions that we're taking, and in terms of product enhancements, again, we are doing all the right actions. Commercial, it's tough. And there was a market dependency that would stop me saying precisely where I think that's going to come out and makes it tough for this year, let alone next year.

So, I can tell you internally we're doing all the right stuff. But the external market dependency in terms of business activity would caution me against giving you any type of long-term projection that says its $6 billion this year and it will be $6.2 billion or whatever. It's too uncertain. There are too many things that are beyond my gift, beyond my ability to control.

And then in terms of margin, what throws me off a lot. Going back to the start, our core assumption is still there's some kind of orderly withdrawal. With all the way rate rise this year. There obviously won't be. Our current view on rate rises is back end of next year on an orderly withdrawal-type basis.

Trying to stress myself to death, if that doesn't come through and if there's some kind no deal. And whoever was talking about the market-implied, which is actually it will either go up or it will come down. If I do move into negative rates, in terms of what that means is something why we'll have to work through. But it's volatile and it's proven that over the last few months in terms of where that market-implied has gone and let's see what happens going forward.

So yes, we're in a slightly different scenario, obviously, from when we sat here two or three months ago. Perhaps I would say this, wouldn't I? I think there is a testament to what this business is about and how it's run that within that scope of change, I'm still able to stand in front of you and present these types of numbers. And that goes back to stuff we bored you with before around the shape of the business model, how it's run, the levers that are available to me across the business. And if I have to pull different levers at different times, so be it, but I know what my objective is and that's how we'll continue to manage the business. That's probably the best I can do.

Fahed Kunwar -- Redburn -- Analyst

Okay. Can I ask one quick follow-up on AIA? Close mortgage book deduction.

George Culmer -- Chief Financial Officer

Yes.

Fahed Kunwar -- Redburn -- Analyst

Obviously, we know that the new gross flows coming on the open mortgage book. Should we start to see AIA pick up from now in the second half of the year? Will the increase in the open book offset the close mortgage book? Are we still looking at a net flat?

George Culmer -- Chief Financial Officer

Well, you're still -- I mean what you've got in terms of AIAs, I mean it's just because of how the comp works. We'll be through the Irish stuff that's gone. That drops out the calculation. That's fine. That makes it easier for start. You're right. They don't really go anywhere unless that mortgage book goes anywhere, because unless the mortgage book grows, the rest of it has to run so hard. Simple math doesn't work. So, I'll be stable this year, but I've still got a slight runoff in terms of about that, whatever it is $18 billion, $19 billion close mortgage book and that will lose $1 billion, and $1.5 billion a year. So, I probably have to convert.

If I'm stable and I've got a $1.5 billion close headwind, then I could probably just about get that flat in terms of consumer finance and then an SME. It depends where I go on things like large corporates. And I said to an answer to an earlier question. We probably will be still looking to continue to optimize large corporates so they're more likely to go down than up. So, if you put all those pieces together, you're probably closer to flat than growth at the moment still.$

Fahed Kunwar -- Redburn -- Analyst

Thank you very much.

Antonio Horta-Osorio -- Group Chief Executive 

Yes. Martin.

Martin Leitgeb -- Goldman Sachs -- Analyst

Good morning. Martin Leitgeb from Goldman Sachs. If I could ask, maybe start with a broader question just on Brexit and Brexit impact on your business and just thinking about the usual variables, loan growth, and credit quality. I think you alluded to that you saw, in particular, an impact on business confidence. I guess business loan demand. Could you share a little bit more light what you're seeing across your business as a retail and a corporate in terms of loan demand? And also, asset quality, whether there have been any pockets of deterioration you have noticed at this stage?

My second question is just with regards to loan provisioning and general loan. I think some of your peers have built general provisions regarding a specific mark for risk facing the UK. I think Lloyd's hasn't just you're thinking behind that. Just to follow-up on the various NIM questions, just if we were just to think about NII progression from here, assuming the rate environment were not to change, how should we think about NII progression from here? Would you expect that the guard will decline from what we have seen over the last two or three quarters would continue? Thank you.

Antonio Horta-Osorio -- Group Chief Executive 

Okay. So, I'll take the first question and George will take the other two. Look as I said, I mean there are to separate this in segments. You have the retail side and you have the corporate side. We are mostly retail bankers, so most of our loans and most of our activity. And on the retail side we see as I said in my introductory remarks, we see no change whatsoever. We don't see a mortgage growth continues at more or less the same pace as the previous year around the 3% stock year on year.

As you know, we have seen a slight deceleration in car finance. It continues to grow in single-digits. We are watching in the latest few months a slowdown in credit cards, but it's positive and UPLs are also growing positive in single-digits. So, we don't see in terms of growth any significant change, a slight slowdown. In terms of impairments, we don't see any signs of impairments on the retail book.

You'll see as we mentioned before, some deterioration in secondhand car prices, which we have both on OLD and a little bit in provisions. That if you remember was something we were anticipating last year and did not happen and we kept the provisions and it happened this year. So, we have adjusted the recording, and as George said, we also changed the model to have the through the cycle provision which got some impact.

Apart from the residual second-hand residual car prices, which I would say is more of a catch up which we expected last year. It happened in the first half. The consumer book is in the same position. We don't see any significant deterioration. I am not surprised about that, Martin, as I think I said as well because when you look, you see employment continue to grow. That obviously improves demands and contributes to GDP consumption. It's two-thirds of GDP.

Real wages are now growing at 1% or more for more than a year, which also supports consumption and GDP and employment is at a historic low since the statistics began being made. As you know, interest rates are very low and going lower. I'm not surprised that on the retail side you see no changes in the current environment. Obviously, subject to no discontinuity.

On the corporate side, as I also mentioned, and we had those already mentioned in Q1 that there was some softening of business confidence. That softening has continued, and I show you the PMI intentions, hiring intentions, and business confidence. In terms of what the translation is in business demands. We have seen a slight deceleration again in SME and mid-market lending and we are now growing at 2%. You might remember that in the past we had been doing it 3%, 4%. We are now going at 2% so a slight increase but not very significant and the market according to our numbers is growing between zero and 1%.

And in terms of impairments on SMEs, our mid-markets, as George mentioned as well, we don't see any change, any systemic change. We have made, as we mentioned before, two additional impairments for two specific cases on two larger corporates, different sectors. So, specific things which sometimes happened in large corporates.

But it's effect as you know, the business confidence is having a progressive softening, but with a small impact so far in terms of business demands and we don't see any signs in impairments, which again should not be the case with a level of interest rate, with a level of employment consumption, etcetera. That's a bit more color going segment by segment. I hope that's helpful.

George Culmer -- Chief Financial Officer

And then two other points. I mean, I fancy the loan provisioning bit should be making specific provisions for specific macro. I mean, I don't know if it's a reference back to coming into the sort of Brexit scenario, but I mean in our first nine provisions and as you know, I have my base, I have a 30%, my upside 30%, my downside 30%, and my extreme 10%, which sort of seems quite obvious. But I think as we went through last year, I don't think it will appear to set off in that position in terms of having that spread. And there were some changes as they moved through the year.

We didn't move because we'd already captured an element of that, that severe right in our one-gen numbers. And we're consistent in the deployment of that as we moved through the year. Now what we have done in terms of this half, as I say, our core assumption is still orderly withdrawal. But we have within that, I think as I said earlier, reflected the current environment and that current environment is slightly lower GDP, is slightly lower HPI, but at the same time slightly better unemployment.

And when I flow all those through my multiple economic scenarios, it had an adverse impact on the sort of tens of millions type stuff in terms of that H1 impairment charge you saw. So our central sort of prognosis of orderly exit hasn't changed and our percentages on the various scenarios hasn't changed, but the backdrop was slightly weakened, but that's not a Brexit that's simply going back to some of the António comments about the economy, just observing what we're seeing around business confidence, GDP, HPI, etcetera. But there is an offset on unemployment. So, we feel that is appropriate and reflective of how we see the world going forward.

And to your last question, which I must say I think is a bit of a setup question, is this did you say. If I assume the rate environment won't change, what happens to NII, which I think was a question? And I think I just said AIA is going to be relatively flat. We've talked about a resilient NIM and we've talked about in the current rate environment of the market implies I'll lose about $250 million. So, in that scenario, we'll just be working harder, Martin. All right?

Martin Leitgeb -- Goldman Sachs -- Analyst

Thank you.

Antonio Horta-Osorio -- Group Chief Executive 

Shall we go there to the other side of the room? We haven't gone yet there. Thank you.

Allie Stimpley -- Morgan Stanley -- Analyst

Good morning. It's Allie Stimpley from Morgan Stanley. I think most of my questions on NIM have been addressed you'll be pleased to hear. But just a quick follow-up on PPI, please. The 190K weekly information requests is obviously a big step up. Could you give us a sense of the uphold rates on that 190 and how that compares to the past?

George Culmer -- Chief Financial Officer

It's not so much uphold but it's the sort of conversion factor. So, I think I said previously the rule of thumb is when we were talking about our sort of 13,000 provision previously, which is what we would assume and what we were observing in terms of complaints process per week. They used to be about 4,000 direct from customer and about 9,000 from CMC originated. And that CMC 9,000 was basically off the back of about 70,000 of these PPI information requests. And so that's a 13% conversion rate.

And then what we've seen, as I said in the presentation, first to 150,000 then to about 190,000 but we have seen that complaint conversion rate drop to, and it's still moving around, but just below sort of 10%. So that's the sort of conversion rate. And we'll process this, we'll work on this. The important thing in all this is that we're four weeks away from the deadline. It is hugely disappointing to have to announce big PPI provision again. And it's also hugely disappointing to have to say uncertainties still remain. But we will be through this. We will get through this. And then we'll move to a much better place beyond, but at the moment it's just a question of dealing with that surge ahead of the deadline.

Antonio Horta-Osorio -- Group Chief Executive 

There was another question over there. Sorry.

Edward Firth -- KBW-- Analyst

Okay. Thanks very much. It's Ed Firth from KBW. Just two quick questions. The first one was on Central. I mean, I think Central is now making a bigger contribution than insurance if I strip out that the 136 in Q1, and we don't really get much guidance as to what's in there and what's driving that number. I mean it bounces around all over the place. So, I wonder if you could help us a little bit, what is actually in there and how we should think about that as it rolls forward? So that was the first question.

And the second question was, I'm just getting quite concerned about credit and I know we've had a couple of questions on this. But if I just look at your numbers, you've got an increasing charge and a falling cover at a time when as you've rightly pointed out, the economy is going pretty well, unemployment is at all-time lows, interest rates are very low, and you don't need to be fanciful to think of any number of shocks that we could hit in the coming six to 12 months.

And yet it doesn't look obvious that you're well prepared for that or that you are adding to your buffers at the moment. So, could you just guide us where are you? How are you looking at that and how are you getting yourself ready for what could be a pretty tough time?

Antonio Horta-Osorio -- Group Chief Executive 

I mean just two comments and George will answer. I mean I think we are very well-prepared for that because the first thing I would tell you, which I said in my introductory remarks, and that's why I have included a long series on the presentation. The best preparation for potential, not likely, but potential as you say, credit chuck, is the rate of your credit growth. Our core loan book is exactly the same as it was eight years ago, as I mentioned, with a $22 billion growth in targeted segments where we were underrepresented.

So, consumer finance and SMEs and the corresponding offsets on parts of the mortgage book that we did not like, and on large corporates where we thought the risk-return was not appropriate. So apart from having shares, practically all of the $200 billion of toxic assets following the H1 acquisition, we have kept the core loan book at around $440 billion.

So, for me, having done banking for 30 years, that's the best indication that you are well-prepared for a potential shock. On top of it, as we told you repeatedly, our model is of a proven model. So, not only on the growth rate, which is zero over 80 years, we only do prime business in the sectors that you know very well. Absolutely concentrated on prime business. We don't chase business, so we have always emphasized mortgage, sorry, mortgage margins, and capital, and risk versus growth. In certain moments over the past, we have been questioned about it. So, we are very confident about that. We have a risk appetite that we review every year and we are well within risk appetite.

And on the third point before George may want to add something. We think we are prudently provisioned. That's what is our internal opinion and of our external auditors. And we have different scenarios to Martin's question where we have a 30% downside, 10% extreme, so high capital levels, zero net debt. So, I mean if there is any external shock, we are as well-prepared as we could be.

George Culmer -- Chief Financial Officer

I would add to that. It touches every part of what we do from risk approval, to book shape, to portfolio construction in terms of that secured, in terms of where we play, in terms of where we don't play. It covers every bit. And then to bring it down to some specifics, the work we've done on single-name exposures.

Yes, we've talked about a couple of names that impacted, but the work we've done over the last few years in terms of the books that were inherited to making sure that our exposure to single-names are brought down and the names you want to be is massive. We show you the loan to value on the mortgages. It's a completely different space.

Let me touch briefly on what we couldn't, what we ended up doing on something like motor financing. We've always talked about being prudently covered. Prices were off a bit this period. We used to allow for about a 4% or 5% reduction. Came through. I've taken for that. I could easily stop there, but our numbers actually now allow for a further reduction. So, I've reset up my prudent provision. I could have stopped short. So, it goes across the whole piece, anyway.

Then to your first question, a couple of things. First up, I really wouldn't strip out the 136 for insurance. I mean, I really think that is about recognition of a better deal, lower expenses, and a real business benefit to insurance. Yes, under insurance accounting on PVs, the benefits, that's the way it is done, but that is a real reflection of a business being better run that will be producing better returns.

So, I think it's completely wrong to strip out the 136. There's also if you look at, they benefit about 240 this year from assumption changes, one of which is the 136, other which is improvements in longevity. These are real business benefits that are coming through to the benefit of shareholders within the business. So, I wouldn't strip it out.

And then in terms of what's in the center, as ever within centers, you've got a mixture of balances, but some element, main elements that sit within there. I've got my guilt gains. So, I've got, which is just under $200 million. I have my LDC which goes through there, which again is about $150 million. I have my Vocalink which sits in there, which is about $50 million. So, all those are kosher balances.

But I also above that have basically the net of things like internal transfer pricing, which doesn't net out to zero, mainly for some technical factors. So, for example, things like the cost of AT1s, which from a P&L perspective go below the line. But in my internal transfer pricing, I charge them out to the businesses. So actually, the center, which is GCT from a P&L respective gets the money back but isn't actually paying out the cost of that because that's below the line. And that kind of makes up the delta. So, those are the main things that are within that.

Antonio Horta-Osorio -- Group Chief Executive 

Also, you wanted to ask a question? Let's take one or two more questions and then we will finish.

Unidentified Analyst -- Analyst

Thank you. Just a question on current accounts strategy, please. And you talked about the balance growth, but the cost data shows that Lloyds has gone from being quite a net gainer until about the middle of last year. The figures last week show you the biggest net loser balances by number and that's across the brands.

George Culmer -- Chief Financial Officer

By number?

Unidentified Analyst -- Analyst

By number. So, a number of people switching away. Lloyds is the number one loser along with both Halifax. Just understand that shift, please.

Antonio Horta-Osorio -- Group Chief Executive 

That's a very interesting thing and we were discussing that, and you can see in the appendix that we show that our market share of digital, which we always present, went down from 21% to 18% and we're looking at why. And the reason is exactly the reason you mentioned because the challenger banks, in general, have been opening lots of current accounts and of course that impacts our market share in spite of us continuing to open current accounts.

Unidentified Analyst -- Analyst

But sorry, just in the switching data though, the challenge is very small. It's HSBC and Nationwide all that stuff's going to, so it's just, that's the net shift. Just understanding in terms of --

Antonio Horta-Osorio -- Group Chief Executive 

In terms of switching data. Well first, don't forget that the switching data is not everything. It's a small part because you have the openings and closures which do not show on the switching data. So, in current accounts, the picture is clear, as I think we showed you. The number, and we showed you that on the slides, the number of active current accounts continues to increase and much more important the quality of those current accounts is improving very significantly.

The average balance per customer has improved by 50% since 2014 significantly above the market. And just to give you the latest available number, which I said earlier as of May, we are growing on PCAs 5% versus a market that is growing by 3%. So, we continue to gain market share and that gives you I think the best indication of quality in current accounts which in the UK, contrarily to other markets, are the most important product from a loyalty point of view.

So, our customers growing the users, we think that the digital offering is a big contribution to that. Those deposits are convenience deposits, not price-oriented. They are growingly putting those deposits with us and our market share is increasing. That's I think the best indication. I was going to make the point on the challengers. Everybody's opening current accounts on the challengers because as you know, the price is zero.

So, for you to have more current accounts that have any costs and there are specific things that people like to do with them, but I think the right criteria to monitor going forward is the quality of those accounts, the average balances, and the potential revenues that they produce to be seen.

Okay. Final question here.

James -- SocGen -- Analyst

Hi, good morning. It's James from SocGen. Can I ask about the non-banking net interest expense, please? I guess this is for you, George. I think I guess it's gone up, become more negative because of IFRS 16.

George Culmer -- Chief Financial Officer

Yes, that's true.

James -- SocGen -- Analyst

I think last time we saw you, you're saying it wouldn't get near to $100 million, but I mean we're already there just in six months of the year. So, is there anything funny in the first half that has made that number more negative or this is a --

George Culmer -- Chief Financial Officer

No, there isn't. Are you sure I said if we can get near to $100 million? My memory does go in these stages.

Antonio Horta-Osorio -- Group Chief Executive 

Especially these days.

George Culmer -- Chief Financial Officer

No, I'm pretty sure I didn't say that. We expected to go up because I mean this is the funding cost of basically non-NII generating aspects and we saw $70 million or whatever in the first half, which is it's slightly old in terms of H1 last year, but it's more in line with the second half of last year, which I think was about $60 million.

And I would expect for the full year to be about double that. I mean IFRS 16 is the $30 million of that. But If I did, I did, and I was wrong because it's basically tracking to where we expected it to be. So, I would expect the full year to be about double this and there is an IFRS16 pickup.

It moves around depending upon because you know, how much type of business that commercial in terms of fee predominately fee-generating income that they do. But elsewhere it's the funding of LDC, the funding of Scottish widows, and things like that. But I would expect to be about double that for the full year.

James -- SocGen -- Analyst

Okay. Thanks.

Antonio Horta-Osorio -- Group Chief Executive 

Thank you. Just before I close, I would just say a few words. As you know, this is George's last set of results before he retires this week. George has been a crucial member of the team and of the turnaround we did here at Lloyd's. So, I think he has been an outstanding CFO. And on behalf of myself, the Group Executive Committee, and the Board. I would just like to publicly thank him. I would like to really recognize your greatest contribution to the bank. Thank you very much, George.

George Culmer -- Chief Financial Officer

Thank you, Antonio.

Antonio Horta-Osorio -- Group Chief Executive 

Thank you, everyone. Good to see you here.

Duration: 96 minutes

Call participants:

Antonio Horta-Osorio -- Group Chief Executive 

Antonio Lorenzo -- Chief Executive Scottish Widows and Group Director Insurance and Wealth

George Culmer -- Chief Financial Officer

Jason Napier -- UBS -- Analyst

Ray -- Bank of America Merrill Lynch -- Analyst

Guy Stebbings -- Exane BNP Paribas -- Analyst

Andrew Coombs -- CITI -- Analyst

Joe Dickerson -- Jefferies -- Analyst

Chris Manners -- Barclays -- Analyst

Unidentified Analyst -- Analyst

Fahed Kunwar -- Redburn -- Analyst

Martin Leitgeb -- Goldman Sachs -- Analyst

Allie Stimpley -- Morgan Stanley -- Analyst

Edward Firth -- KBW-- Analyst

Unidentified Analyst -- Analyst

James -- SocGen -- Analyst

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