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Lloyds Banking Group (NYSE:LYG)
Q3 2019 Earnings Call
Oct 31, 2019, 5:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by and Welcome to the Lloyds Banking Group Q3 2019 Interim Management Statement Conference Call.

[Operator Instructions] Please note this call is scheduled for one hour. I must advise you that this conference is being recorded today. I will now hand the conference over to William Chalmers. Please go ahead.

William Chalmers -- Executive Director and Chief Financial Officer

Thank you and good morning everyone and thank you for joining today's call. We recommend the format of the call from previous quarters and I am planning to give a brief overview of the Group performance and then we'll open up for Q&A. Before getting into the presentation. I thought it important to say that since starting I've been hugely impressed by the customer focused culture of Lloyds and strength of the franchise and the quality of the team. I want to, in that context, express my thanks for the warm welcome and the very supportive environment of experience across the group. So, with that said, turning to the first slide on quarter three.

Financial performance has been solid in a challenging environment. Statutory profit before tax of GBP2.9 billion for the nine months is down significantly, largely due as you know to the additional PPI charge of GBP1.8 billion in the third quarter. Underlying profit, meanwhile, GBP6 billion is down 5% while the underlying return on tangible equity being strong at 15.7%. Revenues were down 3%, while our total costs were down 5%. We've again enhanced our operating cost guidance 2019.

Statutory profit in return on tangible equity was 6.8% obviously impacted by the PPI charge, TNA of GBP0.52 per share is down GBP0.01 in the year. Group build 149 basis points of free cash flow in the nine months for PPI dividends and acquisition of Tesco book. We've also seen, as you've seen, a small reduction in the Pillar 2A requirement in the quarter although, we currently are not revising our capital target of circa 12.5%, the management buffer of around 1%. Given our capital strength, we continue to target progressive and sustainable quarterly dividend.

So, I'll now turn to look at the financial performance in a bit more detail.

Turning to slide 2, you see the overall performance. The net interest margin of 289 basis points has fallen four basis points year-on-year and one basis points in the quarter. This quarter the NIM is benefited by a couple of basis points from the previously planned alignment of MBNA product terms with the rest of the credit card business. I expect to further benefit into the next quarter with this included, we expect to end the year with a full year margin of 288 basis points in line with prior guidance of around 290 for the year.

Looking at the margin, we are maintaining our active approach to managing the balance sheet, including small types of acquisitions such as Tesco to partly mitigate the impact of rates in the competitive environment that we see. Given these rates, we continue to largely hold back from reinvesting and the structural hedge remains at GBP172 billion. Our hedge book balance is around GBP185 billion that gives us a degree of flexibility, should rates rise.

Other income of GBP1.3 billion in the quarter remains tough. We expect the trends behind that to continue into Q4.

In terms of the divisional performance in other income, as we mentioned at the half year, we continue to see a challenging backdrop for our commercial markets businesses and lower fee income in retail in the last year. The lags have being significantly driven by lower fleet volumes and Lex Autolease.

Insurance on the other hand, is continuing to perform well. This is also impacted by rates. We are not seeing occurrence of the benefits from the change in asset management, which we experienced in the first half. Likewise, longevity changes have recently been reported in the first half as indeed they were this year, Central items were also down a bit, partly due to lower gilt sales as we flagged previously. Given the revenue environment we're seeing, we very much maintained our costs focus rather on operating cost reductions. Since arriving, I've been really impressed by the Group's methodical focus on costs, in sourcing of contract staff, the implementation of [Indecipherable] are two good examples of successful initiatives pursued in this area. In this context, total costs were down 5% due to lower remediation charges and within that BAU costs were down 6% while the market leading cost-income ratio has improved again to 46.5%.

Our relentless focus on the cost base, means that we now expect operating cost to be less than GBP7.9 billion in 2019, the second time that we've updated the Groups cost guidance for 2019. This is alongside continued investment in the business. Cost reduction has obviously helped to offset some of the impact of the challenging revenue environment. It's something we will continue to concentrate on in the future and it will remain a source of competitive advantage for the Group.

Now turning to Slide 3. I'll briefly take a look at credit. In Q3, the gross AQR was 40 basis points, net AQR was 33 basis points. Both, as you can see, are impacted by a large single NIM charge in the quarter, which is the top up of one of the two cases we highlighted at the half year. If you exclude that charge, both AQRs have remained low and stable over the last few quarters. We continue to expect the net AQR to be less than 30 basis points for 2019 as a whole.

Despite the ongoing economic uncertainty, underlying credit quality therefore remain strong. We maintain our prudent approach to risk. These arrays [Phonetic] for example, remained low across our key products, mortgages and credit cards for example.

We're also continuing with our conservative approach to IFRS 9 with relatively severe economic assumptions maintained in our MES modeling approach. In this context, stage three balances remained stable at 1.9% of group loans and advances while coverage was in line with year-end at 24%.

So, to move on and look at below the line on Slide 4, the restructuring charges continue to reduce, were down 54% over the last year while the MBNA integration, ringfencing work are now complete.

Volatility and other includes FX related banking volatility in the charge in Q1 for the change in asset manager.

PPI charge of GBP1.8 billion is obviously significant and very disappointing. As we disclosed in September, for the rest of the sector, we received a huge spike in information request in the days leading up to the deadline. We've now completed the work to assess volumes, which were at the high end of expectations. Quality remains low and PIR conversion is still averaging around the 10% mark that we talked about previously. We're seeing some variation across time periods on this front. We've also included within the GBP1.8 billion, a charge for the Official Receiver. Moving down, higher effective tax rate of 33% year-to-date reflects the non-deductibility of certain PCR address costs. Beyond this, we continue to expect the medium-term effective tax rate around 25%.

Looking briefly at returns, as I mentioned earlier, the underlying return on tangible equity remains strong at 15.7% while the statutory return of 6.8% has been clearly impacted by PPI.

So let's turn to the balance sheet on Slide 5. We've seen good growth in the quarter. The open mortgage book is up GBP6.1 billion from the half year , including a GBP3.7 billion Tesco book acquisition. Strong underlying growth of GBP2.4 billion is a result of increased new business flows. We took advantage of a more favorable market over the summer months. We maintain our focus on pricing discipline. We will write our business when it looks attractive This is part of the active balance sheet management which I referred to earlier on.

A strong third quarter in Tesco acquisition mean that we now have greater participation flexibility, this all included expect, we expect the open book to end the year above 2018 levels. Elsewhere, we continue to grow in our other targeted segments, SMEs for example is up 2% from the prior year, while motor finance is up 8% at 1% above the market.

We also continue to attract high quality deposit balances. Total current accounts are up 3% from the prior year. Within that, there continues to be a material outperformance in UK personal current accounts which should grow about 50% ahead of a highly competitive market. As you've heard, this has increased our hedgeable balance to about GBP185 billion, of which about GBP13 billion is currently unused. RWA is up GBP3 billion in the year-to-date with the impact of IFRS 16 and the Tesco acquisition largely offset by the ongoing optimization within the commercial portfolio.

So finally, we'll turn to capital on Slide 6. Capital build remains healthy as illustrated by the Group delivering a 149 basis points of free capital before the impact of PPI and Tesco. Group's organic capital build is supplemented by 34 basis points from the cancellation of the in flight [Phonetic] buyback, and additional capacity from year-on-year, a 50 basis point reduction from the Group's capital target to circa 13.5%.

Meanwhile, we used 9 basis points of capital with the acquisition of the Tesco book. As you can see, we expect the Group to build circa 75 basis points of free capital in 2019, net of PPI charges which equated in total to a 121 basis points. This implies the underlying capital build after PPI for the year is likely to be slightly below the guidance that we gave at the half year. We're pleased obviously to see the equity component of our Pillar 2A charge come down by a further 10 basis points this quarter. That came off for the group as announced at a lower capital target circa 12.5% plus a management buffer of circa 1% in Q1.

That said, we are currently maintaining our Group target and in fact, we now have an additional 10 basis points of capital headroom for regulatory requirements. And so, as I mentioned earlier, given the Group's capital strength, we continue to target a progressive and sustainable ordinary dividend while staying comfortably above the Group's capital target.

So if I turn to the last slide, in conclusion, the Group has the right strategy for the current environment, continue to deliver against our strategic priorities, having invested GBP1.7 billion since launch of GSR3 in 2018.

This quarter, for example, we've launched Schroders Personal Wealth, with the ambition of being a top three financial planning business by the end of 2023. Our business performance, as you can see, the returns remain solid and the resilience of the business model is reflected in the 2019 guidance. We obviously acknowledge the pressure from the external environment. For 2019, we expect the net interest margin of 288 basis points in line with our guidance of around 290 basis points for the year. For 2019, we now expect operating costs, excluding remediation to be less than GBP7.9 billion ahead of our previous guidance with a lower cost-income ratio in 2018. We also expect the net asset quality ratio to be less than 30 basis points.

Given the PPI charge in the quarter, we expect free capital build to be circa 75 basis points for the year. And as I've said, we continue to target a progressive and sustainable ordinary dividend. So, overall, the subdued environment is having an impact on the economy and therefore inevitably on our business. Continued uncertainty could further impact the outlook. But in this context, and as ever, we continue to maintain our focus on prudent growth, reducing costs and investing in the business. Even in an uncertain environment, our solid business performance and continued delivery against our demand in strategic goals, mean that we are well-placed to support our customers and to continue to help Britain prosper. That's all I want to say upfront. So, now I think we have some time for Q&A.

Questions and Answers:

Operator

[Operator Instructions]. Your first question comes from the line of Rahul -- from Jason Napier, UBS. Please go ahead. You're live in the call.

Jason Napier -- UBS -- Analyst

Good morning. Thank you for taking my questions. Two, please, the first , other operating income was a little light of us and quite a lot below-market expectations, but the sort of divisional trends that you're outlining, I don't feel like those are the sort of thing that might change in the sort of near-term, is it your expectation, we should be annualizing the third quarter run rate? And then the second question, and I guess this is somewhat linked to the first is around the walk forward for capital generation, the sort of implications of your full-year target are that you're expecting to be pretty much back at the 200 bps a year cap gen number. I just wonder, looking forward to 2020 with that sort of through the plan aspiration remains appropriate, whether there are any moving parts around regulatory change or sort of other foreseeable items that might change that. Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Okay, Jason. Maybe I'll deal with them in turn that you are asking. The other operating income, so I said in my comments, the other income environment remains tough, those trends or the factors behind those trends, I should say we expect to continue into Q4, at the same time just to look at it in a bit more detail, If you look at it, it's four lines really, commercial, it's under pressure again, as I indicated in my comments from markets comparative last year is a relatively tough comparative, the retail business, which is pretty much steady and insurance business which no doubt will go up and down in any given quarter. But there are some strong structural support and the benefits from organic changes in the first half CG [Phonetic] older enrollment and some one-off CG, the change in asset manager benefit, some experience gains, longevity gains in particular. And then finally the fourth area which is other, which benefits as in H1 from gilt gains, a little bit from LDC in 2018 as a comparative.

I think that gives you some idea if you like on the trends behind the numbers. In terms of annualizing Q3, i'm not going to give guidance on this call for 2020. We'll save that for the year-end results in the first part of 2020. But I would be careful before annualizing at other income trend from Q3. The reasons for that I think are in the trend analysis that I talked about earlier on that is to say, commercial as I think a lot of businesses are right now, is under some pressure in markets. There is not much investment activity going on as being reflected in some of our commercial lines. We certainly hope that environment clears up going into 2020 and with it the commercial markets business, we expect will come back.

And the retail said I expect will be flattish, insurance as said it has some structural growth drivers I think importantly you also typically see longevity and other experience gains in the first half as we saw this year. And then of course the central items, gilt gains and others, they're always difficult to predict, but they'll go up and down, and in this quarter in particular they were basically nothing. In the last quarter and earlier on this year, they were more considerable. So I would just be cautious before annualizing Q3 into 2020 as a whole.

I think the second question that you asked, capital generation of the business, which as you know is close to the heart of this business and is an issue, if you like, that we take pretty seriously. The comments that I make again, I'll steer away from being too explicit on 2020 guidance but the comments I'll make will help to give you a picture. It's a strongly capital generative business as you know, the business model is very capital generative. I think if we look at this year, we've got 75 basis points for the full year that I mentioned, if you add back the 121 basis points that we've consumed in PPI charges will mirror another and you can see the total capital generation adding those two together as well within a 170 to 200 basis points range that some -- that had been indicated.

I think next year, there is no doubt we'll see a tough external environment and everybody are saying the same thing. But we've also got levers to pull, if you like, to help partly mitigate that and we've been successful in doing so in the third quarter as most obviously cost as you seen in this quarter and as the group has a strong reputation for, that will help mitigate some of the external pressures and then obviously we don't expect the PPI charge to be repeated. I think just adding to that, we are moving and our base case, I should say, is moving to a better outlook on expected RWA headwinds. We've talked about GBP7 billion to GBP10 billion range at the half year, we're looking at, right now, at the bottom end or possibly slightly below that. We'll give some more updates at the 2019 full year results.

And that obviously helps. So, I'll give more guidance at the 2019 year end in 2020 or that's when I will give the guidance, I guess in accordance with our usual planning process. But I think overall, I don't expect the capital generation characteristics of the business to change too much and hopefully that gives you a picture.

Jason Napier -- UBS -- Analyst

Thanks very much.

Operator

Thank you. Next question comes from the line of Rahul Sinha, JPMorgan. Please go ahead. You're live in the call.

Rahul Sinha -- JP Morgan -- Analyst

I think I'm lucky. Thanks for taking my questions. Just to clarify then, William, on the other income line of while we shouldn't be annualizing it, but you do think that some of the headwinds that you've seen in Q3 will persist into Q4, is that a fair conclusion then?

William Chalmers -- Executive Director and Chief Financial Officer

So Q4, I think it is, for the time being, a fair conclusion. Again, if I look at the drivers of that, commercial is an obvious one. We would have liked to see frankly a bit more stability in the external environments and it now looks like we're going to go through a period of -- well, a question period, I suppose as the policies are getting resolved and with it the nature of the macroeconomic environment that we'll have to deal with. But I think there is evidence in the commercial business and investment decisions have been holding back and with that, a lot of the markets lines, marketing activities in our commercial businesses are driven and in the absence of investments, has a number of tail features around it in terms of hedging activity and other things that our clients, would typically do. And in short, we're not seeing much of it, we do think as the macro economy settles down and then we expect to see some of that return but obviously the macro economy will settle down only when the political questions are resolved.

That's one reason why I think it is as it is for Q4, but we would hope that it comes back during the course of 2020.

Rahul Sinha -- JP Morgan -- Analyst

Can I check if you change your appetite are on bulk annuities at all given that's particularly volatile, hard to predict line within the other income that tends to bulk up and down, historically we've seen quiet quarter's being followed by some strong outcomes. So is there any change in the bulk annuities pipeline?

William Chalmers -- Executive Director and Chief Financial Officer

No, not really. Rahul, It's a -- bulk annuities is obviously an important area of the business, it's also got some secular tailwinds behind it. I think what you do see with bulks is timing issues. You will get more in any one quarter or less than any other quarter and if you look at our Q3, we didn't get much. We are engaged in bulk activity and we will expect to see a little bit more of that in Q4 but that's simply just because of when deals get signed, it's not any more precise than that really. The one comment I would make on bulk is that there are two sides to them. One is obviously the pricing of the bulk asset, if you can call it that, if you like, and then the second is the actual assets that you get to back up the bulk when you bring them on the balance sheet to earn a return.

We typically are quite cautious on both. And that is to say we don't tend to enter the bulk markets when we don't think we can earn a decent return in the pricing of those bulks. Equally, we have quite strict liquid asset constraints, if you like, simply because of a prudent risk appetite and that allows us to do the bulks when we think they make sense and it also constraints us from not doing the bulks when we don't think they do. So each of those two factors play into it but I think no change in risk appetite, you will see bulk going up or down on a quarter-by-quarter basis, simply by virtue of the timing of signing of certain deals.

Rahul Sinha -- JP Morgan -- Analyst

Thank you. Can I just quickly clarify the motor finance charge in the quarter? Would you be able to give us any sense of how big it was and is that driven by the growth in the book, if you've got any thoughts in terms of sensitivity of the business that would be really helpful. Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Sure. The motor finance charge, I won't put a precise number on it, but the motor finance charge has been a component, if you like, of the impairment charge that we've seen in this quarter. In fact, we've seen a little bit of it in the earlier quarters of this year as well and it's driven by [Indecipherable] of the second hand car prices. That in turn is driven by supply side as much as demand side, which is to say, there was quite a lot of new car input, if you like, in some outflow into the market about three years ago, I will say. That was all put on three year contracts and it bounced back as a result in 2019 and caused some softening in prices off the back of that supply side. Demand side of the equation, just like any other consumer durable, the commercial investments that we were talking about earlier on is a little bit constrained in the context of uncertain macroeconomic environments, has a bit of down side effect -- sorry, demand side effect that too.

The only point I would make is that, in addition to that, is that we've seen that fortunately coming back a little bit just recently, that is to say, we saw some downward pressure in the first three quarters.The data, at the moment, is indicating a slightly more positive turn and improved prices. I don't want to call out just yet, because it's just too early to say but it is looking better recently versus what we've seen in the first three quarters of this year.

Rahul Sinha -- JP Morgan -- Analyst

Thank you very much. That's really helpful.

Operator

Thank you. Your next question comes from the line of Joe Dickerson, Jefferies. Please go ahead. You're live in the call.

Joe Dickerson -- Jefferies -- Analyst

Hi, good morning. Thank you for taking my call. I guess just a quick question would be on the capital return, the capital generating characteristics of the business haven't deviated from the prior underlying trend, what would be the hurdle to you distributing down to your revised capital target plus a 100 basis points buffer when we get to full year results, firstly. And then, secondly just on the Lex Autolease comment on the other income, is there anything going on there that's structural, is that more of a transitory trend linked to, for instance, the same trends that are driving corporate activity?

William Chalmers -- Executive Director and Chief Financial Officer

Sure, maybe i'll just deal with the first of those two. The capital distribution -- sorry, the capital generation is as described earlier on which hopefully was useful. As we look toward the year-end, as you know, the dividend is incredibly important to us, and I've made several comments today that indicate our commitment to that dividend. We expect that you'd be able to sort of do the arithmetic, if you like, with the numbers I've given you, that we will be comfortably above the Group target or the Board's target in that context. And yeah, let's see, but to the extent that arises or rather gives rise to excess capital, to go beyond the commitment to the ordinary dividend, then that's very much a matter of the Board toward the year-end and that'll take a view on any buyback considerations at that point, but we do feel very comfortable as of the capital position. We have a complete commitment to ordinary dividend, matters around buyback and distribution of excess capital beyond that.

In the light of the current capital targets, in light, obviously the Pillar 2A benefit that I mentioned earlier on, that's all a matter for the Board toward the year-end.

The second point around Lex Autolease, we've seen in Lex Autolease a bit of a reduction as mentioned I think in the RNS around the overall fleet size there. That's a function of two things. The main is a function simply of corporates revising their company car strategies and that obviously drives the Lex Autolease performance or at least stock and then to a degree, at least, we are also making sure that our pricing lives up to our margin expectations in ROE requirements, which allows us to deliver, if you like, a healthy business, while also allowing it to grow and succeed in the marketplace. So hopefully that gives a a bit of color, if you like, on that business.

Joe Dickerson -- Jefferies -- Analyst

Quite helpful. Thank you.

Operator

Thank you. Next question comes from the line of Fahed Kunwar, Redburn. Please go ahead. You're live in the call.

Fahed Kunwar -- Redburn -- Analyst

Good morning. A couple of question ,on NII, there was a comment on MBNA alignment, how much do that benefit gains would come in the quarter? And my second question is on loan losses. Again, thanks for the color on the car market and a lot of your peers are taking IFRS 9 charge and it looks like your impairment increase today was about a specific incident that happened in the quarter, there was no change in kind of economic combustions or model that let to kind of the increase or decrease in IFRS 9 point of view, could you help us understand why as your peers are making these changes, but you don't think [Indecipherable]. Thanks.

William Chalmers -- Executive Director and Chief Financial Officer

Sure. Dealing with the MBNA change for the moment, as mentioned, it's a couple of basis points in the margin this quarter from the product alignment. You will see also something similar during the course of Q4. That was an exercise that started in August that will finish in December, hence the fact that it comes across the two quarters. Essentially what it is, it's an alignment between products in Lloyds and MBNA portfolio in the cost area, obviously. And when we bring the two into line, it just means amending the balance transfer period, which as you know is effectively IR accounted and that in turn means accruing some income into the current period and hence couple of basis points, so I described. That's probably as much as it makes sense to say really on the point I hope it gives the color and context that you need in terms of the quantum and also the mechanics behind it.

Fahed Kunwar -- Redburn -- Analyst

Just so I understand, is that about a GBP40 million, GBP50 million benefit then over the second half from this alignment as you go forward?

William Chalmers -- Executive Director and Chief Financial Officer

Yeah, I mean it's roughly that. We're trying to take a conservative approach to the amount that we put in Q3 versus the amount that we put in Q4, but you know, a million miles off and the loan losses point IFRS 9, it's obviously an important point. It's in the charge year-to-date here, which is 950 for portfolio as a whole. The IFRS 9 approach that we take, we consider it to be a very pure approach and very consistent with the IFRS 9 guidance that has been given. And effectively what it does is, it takes a base case and then it shocks for that base case, shocks around that, so you then get a distribution, if you like, of different macroeconomic and indeed asset quality implications. Some of those, because of the nature of distribution, are more benign than the base case, some of those significantly more severe than the base case and you've seen that we then put it into base case upside, mild downside and severe downside. We have off the back of that distribution, probability weighted alignment, which feeds into our ECL [Phonetic]. So when we talk about the overall IFRS 9 charge that is put into our accounts, if you like, it already takes account of that spreaded distributions, including some very severe downside macroeconomic and the loan book implications. To give you one example on that, in our severe downside house prices go down by the order of 35% over the course of the five-year period. Commercial prices, I think are down a notch above that between 35% and 40% over that same period. And those in turn are fading on a probability weighted basis to our charge. So from our perspective, we have a range of macroeconomic assumptions built into our ECL and when others talk about putting overlays or others into that charge, from our perspective, it's already built in.

Fahed Kunwar -- Redburn -- Analyst

Okay, thanks. Sorry, just can I add one quick follow-up on that, as you mentioned that, it's kind of a spot question. I remember you had a GBP100 million buffer in your loan loss charge for [Indecipherable] value discounts on the core lending book, have cost prices fallen so much that the buffer's been increased -- has that been utilized or have you kind of topped off the charge such that the GBP100 million buffer has remained?

William Chalmers -- Executive Director and Chief Financial Officer

Yeah. I'm probably not going to go beyond the disclosure that we provide in the IMS and so forth and safe to say that we typically take a very conservative view on cars and we build in buffers, some would say buffers upon buffers in terms of the way in which we assess these charges and the first three quarters experienced within second hand car prices were comfortably within any buffer or expectations that we had. We're obviously pleased to see a bit of a turn in the course of the early -- no, first month, I should say of Q4. But as I said earlier on, that's cool that when it's a trend rather than when it's just a few weeks or months. And safe to say that the buffers that we have are still in significant part there.

Fahed Kunwar -- Redburn -- Analyst

Perfect, thank you very much.

Operator

Thank you. Your next question comes from the line of Andrew Coombs, Citi. Please go ahead.

Andrew Coombs -- Citi -- Analyst

Good morning. I have a couple of follow-ups. Firstly on the EIR [Phonetic] accounting, both with respect to MBNA alignment, but also on the mortgage book. On MBNA, I think the reason, you've seen the EIR benefit because you are actually changing the bank charter period on some of the cards. You said it's going to repeat in Q4 there'd be another uplift. Is that something that then dropped away or because there is actually a change in the duration, if that's something that is now at the status quo going forward. And then with respect to the mortgage book, we saw with Barclays, in the second quarter, they changed some of their assumptions to do the length of period at which customers down the FBR [Phonetic] and took a one-off charge through any EIR assumptions there. [Indecipherable]

something similar in 4Q. So with that in mind, can you just comment on your FBR experience, what you're seeing in terms of attrition rate shifting toward [Indecipherable]. You said we're accelerating, I know also that means we would hope we can also expect an EIR assumption change from you as well. Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Sure. Again, two questions. I'll maybe take the first one first. The MBNA product alignment, if you like is a rate alignment, which in turn produces essentially a one-off. In this case it's going to be spread across two quarters, change is then choose [Phonetic] your language does effectively drop away. So I wouldn't expect that to be repeating itself into 2020 .

the second of the two questions. The Barclays point, I obviously can't really comment on Barclays accounting and kind of quite how it works in their FBR. I think to comment on our own book and what we see, we are pretty conservative, very conservative on the EIR assumptions and so we have a relatively small EIR asset which is then reviewed every year.

Any true-ups that we see from that review typically are immaterial. I mean I'm obviously referring here to the mortgage accounting specifically, given your question. So we are seeing a little bit of shortening in behavioral lives. It's not dramatic. To be honest, but it's a little bit of shortening but that isn't causing us any significant EIR implications, if you like. So again I don't want to draw comparisons against others particularly but that just speaks for our own situation. Your then sort of question that was attendant to that around the FBR and the attrition and so forth within that book, it's very much as we said at the half year, which I think was around the 15% mark, and we're not seeing any particular change from that as we speak today. That's staying around that level.

Andrew Coombs -- Citi -- Analyst

Thank you.

Operator

Thank you. Next question comes from the line of Chris Manners, Barclays Research. Please go ahead.

Chris Manners -- Barclays Research -- Analyst

Good morning, William.

William Chalmers -- Executive Director and Chief Financial Officer

Hi, Chris.

Chris Manners -- Barclays Research -- Analyst

Hey. Yeah, so. three questions, if I may. The first one was on PPI and when I looked at the statement you put out in September, it looked like you'd received around GBP3.5 million PIRs in two-month period, which seem to be quite a lot. Obviously, you gave a quite a wide guidance range on how much the charge would be and you've come in right at the top end of that range, at the moment, but I would also like to just give us a bit more color on what surprised you and why you've come up right at the top end of that range.

And the second question was on costs. If I look at consensus 2021 you have got a 47% cost-income ratio I know that previously you've guided to sort of low 40s cost-income ratio exit rate for 2020, you flagged a few more headwinds on revenue. How should we think about that cost income ratio target?

And then the last question was just on mortgage competition. I guess you've grown mortgage balances in the quarter. And presumably that's because you've actually seen what you think is a good risk adjusted return and a decent ROE because you've had a widening of spreads as swap rates fell, maybe if you could just explore this a little bit how you see mortgage competition and whether you financially continue to grow at that pace, or given that now spreads have narrowed and swap rates have come back up again, whether you might hold off again. Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Sure. Thanks, Chris. Three questions. First of all PPI. The GBP1.8 billion provision that we've taken today as was described in September, as you know essentially has three components to it. The first component is around PIRs direct customer complaints. Second component around the Official Receiver and then the third component is around operational charges including financial ombudsmen and other I guess. When we look at that, what has been interesting to us in the period, since we made the announcement in September, I guess we have now got a very complete picture, I should say, much more complete picture than we were in September and it's very complete on volumes where we've now been through the stock available to us and it's also now much better informed on quality. There is -- that in turn allows us to get a good grip on both of those numbers, I've indicated about 10% in terms of the quality.

Within that period, there has been a bit of variation. Some periods has been higher, some lower, but overall averaging at about 10%. That piece, if you like, takes up a large chunk of the GBP1.8 billion overall provision and we are deliberately, if you like, making sure that we feel comfortable on a best estimate basis obviously as to both quantity and quality there. The Official Receiver, is obviously in areas that all banks have looked at and we feel that it's appropriate just to take a prudent view on what might come out of that Official Receiver situation. Even though it's quite a wide range of outcomes I suppose in respect to that one.

And then finally operational costs and financial ombudsmen, to a degree, at least, those follow the first line via the volumes and otherwise PIRs and direct complaints that you might get.

So why have we come out at the top end? I think we've come out at the top-end because the further work that we have done has confirmed coming out of the top-end is the appropriate place to come out at, and I said, it allows us to form very much a best estimate of what the rate provision might be. Now having said that, as with all provisions, there's a degree of uncertainty. I think the last thing that George said to me when he walked out of the office is, never say never on this topic. So I'll take that advice. But that's kind of where we are in the PPI, if you like.

Costs, you're going into the area of guidance now, Chris, which I'm going to be a little bit cautious on just because that's really for me for the year-end in the first part of 2020. It is, as you rightly said, a tough revenue environment today and it will take a bit of time before it gets better, no doubt. And the cost income ratio is a function both of the income line obviously and also the cost line. The one point that everybody should draw some comfort from, if you like, is as I mentioned before, the relentless focus on costs really that we have around here. I mentioned a couple of examples, in the words that I gave earlier on, there are others, for example 50% of the non-FTE cost base is, if you like, up for renewal every three years, because of the nature of contracts, that allows us to take a good look at that chunk of the cost base every year, or at least a good chunk thereof. So I think the cost is the lever that we feel we are good at and to a degree at least is under our control, the external environment, less so, and the precise implications that from a guidance point of view, I'll fill in, in the beginning of 2020 with the year-end results.

And then finally, your third question, mortgage competition. You're right, it ebbs and flows in this area. We saw a very competitive market going into the early part of the summer, have one reason or another and somewhat positive because of the summer holidays that then eased off during the course of the summer and worked its way into pipelines and gave us a good organic share, which I think was getting up toward kind of 19% or so share of the market at that point and that was, as you say, based on a view that we could earn an attractive risk-adjusted return because of margins coming back in a more favorable place.

It's a core product trust. So that was welcome to see at the same time, we've seen a little bit of adding in the margins since then, again, into the autumn, it's come away a little bit. It's not yet back to the level that it was earlier on this summer. But it's not as attractive as it was when we were participating in full. And so we do step back a little bit in those conditions and the growth as a result, that you will see at the end of the year, would reflect that. We still expect the open book to be in the right place, we obviously have the benefit of Tesco, which allows us to moderate our organic participation in the market or not as we see fit and that hopefully works to our advantage. So, we will participate on a flexible basis, again that's assisted by the Tesco acquisition in that respect and we will be selective about when we enter the market and when we don't based on what we think returns will be.

Chris Manners -- Barclays Research -- Analyst

Understood. And could I just ask a small follow-up on that, and I think you were talking earlier in the call about your RWA inflation maybe coming in the lower end of where you'd expect to date, would that actually mean that you got less RWA inflation on your mortgages, so your deal or your spread you would need to meet hurdle might be a little bit lower, making it a little bit more competitive or is that [Indecipherable] inflation benefit coming somewhere else in the book ?

William Chalmers -- Executive Director and Chief Financial Officer

Sure. The RWA changes, it's -- I'll just briefly comment on why. First of all , this is just our current base case. So there is risk around the situation, we'll give more information at the year-end, but our current basis, as I said earlier on, our current base case, I should say as I said earlier on, is moving toward the lower end of where we were at the summer. When we look at that, and there's a couple of characteristics, if you like, of building blocks when the RWA inflation, one is in retail and the other is in commercial. The reasons why or other reasons why our RWA expectations are evolving in the way I just described are some of it has been taken in 2019 as our models adjust a little bit of it may be taken in 2021, I view on the 2020 time period. And our model refinements in turn may take us to the view that the RWA inflation per se is perhaps a little bit less bad, for want of a better word, than it might have been so it's each of those three reasons.

And again, we will update in a bit more detail toward the year-end. I think on your question about pricing and implications for mortgage rate, I must say, when we look at it, it is not obvious to us that the market was rationally pricing based upon where RWA's were previously. And so when you say well, will that encourage us to get into the market much more, I mean possibly, but it very much depends upon markets. I think the key issue, as said, is that the pricing of mortgages when they're very low margins in our view did not take account of the existing RWA framework as it was at that time. So as it bounces back the implications will, if you like, be dependent upon that.

Chris Manners -- Barclays Research -- Analyst

That sounds great. Thank you .

Operator

Thank you. Your next question comes from the line of Martin Leitgeb, Goldman Sachs. Please go ahead.

Martin Leitgeb -- Goldman Sachs -- Analyst

Yes, good morning. Could I just have a follow-up on the mortgage question. And firstly, I would just like to ask you whether you could disclose your SVR [Phonetic] book size as of third quarter and over the medium-term, I was just wondering whether you could give us a steer where you think the yield on the mortgage book will go. I think last disclosed as of half year was the mortgage book had a yield of around 180 basis points and I think during the call, it was mentioned that new business is coming in at 100, slightly over 100. So I was just wondering if you could give us a steer over the medium-term over the next two, three years where you would expect that kind of cross-sell to go.

And then the second question is more broad and it might be a bit early, given that probably the guidance you give around full year, but I was just wondering in terms of what you think the return capacity of the bank is with a kind of the medium term, just given, given current condition and I appreciate a lot has changed over the last couple of quarters, the last couple of years. Obviously, the rates outlook is lower globally, rates expectation in the UK have changed, mortgage pricing remains to be meaningfully below existing book yield and equally on fee income and impairment levels trends seem to have slightly changed over the recent past. I was just wondering compared to your prior guidance 14 to 15, I think consensus at the moment is a 13 if things were to stay at current level. Could you give us a steer on where return should be heading? Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Okay, thanks. I think there are, there are basically three questions in the points there the SVR component of the book as of 3Q, I am not going to put a number on that, but we've given -- you know the number as of the disclosure last time around, you know the attrition has been roughly what I've said earlier on in the call.

You can, I'm sure get to a number of the back of those two. And again, you probably wouldn't be a million miles off if you apply those metrics. The yield for the business, if you like, new business pricing, I think what you said just over around 100 basis points, It's probably not far off. It's -- I know it's been commented on by a number of banks during this reporting season. I don't think that their yields will necessarily be hugely different to us. As said we maybe a bit more selective than some of that when we go into the market and when we don't and that might drive a bit of a difference in yields for that reason.

ROE guidance, again I'm going to stay away from precise guidance for 2020 and beyond. That will be done at the half year, as I said earlier on, I think I'd just draw your attention back if you like to some of the comments I made earlier on around capital production in the business and the fact that, let's say, it's a strongly capital generative business. We don't expect that to change.

Martin Leitgeb -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. Your next question comes from the line of Guy Stebbings, Exane. Please go ahead. You're live in the call.

Guy Stebbings -- Exane BNP -- Analyst

Good morning, thanks for taking the questions. I had one on the structural hedge. And then one on the capital target. On the structural hedge that you referenced the GBP13 billion of excess notional hedgeable balance and I think there's around GBP10 billion maturing in the fourth quarter, so perhaps GBP20 billion to GBP25 billion of total hedge capacity in Q4 to deploy. So if I check first year, those assumptions [Indecipherable] what's your current thinking around the hedge given where prevailing swap rates are because, obviously it's quite a big delta as we look ahead.

And then on capital, you talked about the benefit of Pillar 2A about maintaining the target for now in your opening remarks. Perhaps I'm reading too much into that comment. But were you hinting we could see a favor, sorry a future favorable provision there perhaps if the stress test result in December goes well for you and I appreciate it's a matter for the Board, but perhaps you can give some color around, that would be very useful. Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Okay, thanks, Guy. On the first issue around the structural hedge. I think the GBP13 billion excess, you obviously heard in the comment and that gives us a degree of optionality to invest different when rates come back. At the moment when we look at the shape of the curve, there really isn't much point in investing. You get the same yield back off a three-month investment, as you do off of a five-year investment and so we kind of sit tight when all that happens. Some of the worry that you have around the structural hedge over the course of the next few months is probably a bit less of a worry on the basis that we've taken some risk off the table, as we look toward 2020 and that was done when we saw spreads coming back earlier on in the quarter. So we took some advantage of those widening spreads to take off some of the back end of 2019 risk that you're referring to.

And then as we look forward, having said that, and I think this is consistent with what was said at the half year, we see some attrition in the hedge over the course of the next year. I think it was in total around GBP30 billion, GBP40 billion over the course of 15 months, which gives you a sense as to how the the shape of the hedge, if you like, over the course of the next year.

And so that's kind of where we are, if you like, in terms of checking your numbers, those are the points I would make. On the second of your two questions, capital point Pillar 2A, in particular, that really is a matter for the Board. So all I want to do is to point out the Pillar 2A revision has obviously come in, it's very welcome. It's in our favor, and it gives us a further 10 basis point headroom again to regulatory requirements, but how that has responded to if you like is really a matter for the Board, which I'm sure they'll consider in due course.

Guy Stebbings -- Exane BNP -- Analyst

Okay, thank you.

Operator

Thank you. Your next question comes from the line of Jonathan Pierce, Numis. Please go ahead.

Jonathan Pierce -- Numis Securities Limited -- Analyst

Hello, there. Just got one question really on the insurance company. I don't know if you can give us an update on the Solvency II ratio of Scottish Widows, Q3 obviously came down and Q2 partly because of the foreseeable dividend, but also the movement in market rates, is that decline continue to an extent in Q3, and similarly, can you give us any sense as to what you're thinking with regard to potential dividend up streams at the full year stage. Thanks very much.

William Chalmers -- Executive Director and Chief Financial Officer

Sure, thanks, Jonathan. The solvency position of the insurance company, we don't obviously disclose on a quarterly basis. I don't want to change that for the time being at least. I think that the Solvency II ratio is obviously over term, over the period of time gets driven by rate, just as it does with any insurance company. For the time being at least the solvency position looks very comfortable and as we project that forward into the last part of this year and early part of next. Likewise, we feel very comfortable on it. There's no doubt that if the long-term rates picture remains depressed that does eat in to solvency over time and we would expect to see that just like others would, I'm sure. And it is the solvency position I'll just make one more comment, no, rates comment actually more an equity comment. We have taken Cognex stands in terms of hedging. the insurance position, particularly in relation to equities. And that gives us a bit more comfort over the solvency position for the company as a whole and a bit more conviction in what it will be toward the end of this year, so that's helpful. And, I think you've got another part to your question, Jonathan.

Jonathan Pierce -- Numis Securities Limited -- Analyst

Yeah, I was just wondering what we should maybe expect in terms of upstream of the full year, there was GBP350 million in February of this year will it be that order of magnitude again?

William Chalmers -- Executive Director and Chief Financial Officer

Yeah. Sorry, Jonathan. I am -- I didn't write that down . The dividend -- just another governance matter -- procedural matter, the dividend from insurance companies is a matter for the insurance Board. And so I don't want to pre-empt that at all. It's for them at the right time. I think the comments that I made earlier on around the solvency position of the company, hopefully allow us to be confident that the dividend expectations, if you like, that we have at the Group level should be met because that solvency position is as I've described. But to be clear, that is a matter for the insurance Board to be -- and a decision to be taken up at the right time by them.

Jonathan Pierce -- Numis Securities Limited -- Analyst

Okay, great. Thanks very much.

Operator

Thank you. Your next question comes from the line of Chris Cant, Autonomous. Please go ahead. Your live in the call.

Chris Cant -- Autonomous -- Analyst

Good morning. Thank you for taking my questions. One quick follow-up or clarification on NIM, please. And then a couple on other income. On NIM, I think your 288 bps guidance for the full year implies circa 285 to 286 basis points for the fourth quarter, if I understood your comments on MBNA correctly, there's about 2 bps of benefit then in the fourth quarter number, which would imply an underlying exit run rate going into 1Q of next year of 283 to 284 basis points, is that the correct interpretation of what you've told us today, please?

And then on other income. You indicated retail other income should be flattish into next year. A couple of your peers including Santander UK yesterday have flagged overdraft fee changes -- regulatory driven overdraft fee changes as quite a big impact potentially into next year. What is the impact of that for Lloyds please, if you could quantify that for us going into next year, given how close we are to the end of 2019 and what offset do you expect to that in order to keep retail flattish into next year? Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Yeah, OK. Thanks, Chris. On the first of your two questions, on NIM. I'm not going to be sort of overly precise if you like on the point, but your interpretation of the guidance for the full year, the implication of that for Q4 within that of a component of the product alignment that I mentioned earlier on, all of those building blocks are the right building blocks to be using. And therefore, I'll leave you just kind of draw your precise conclusions on that, as you will, but all of those building blocks that you're taking and the influences that you're drawing basically right. And the second of your two question retail ROI, again I don't want to comment too much on Santander and what they may be seeing but the one point I would make is that, as you'll be aware there has been a change in the product here on overdraft facility and that's been -- actually predates me, but there was a redrawing of the overdraft facility which essentially did away with an awful lot of the fees that were previously imposed on customers and although that will need a bit of refinement in the context of the FTE [Phonetic] guidance that has come out since then and that will be done, most of the headwinds, if you like, from a fee perspective were taken out with that initial product redesign when it was taken. So as a result the headwinds that others might be seeing at least in insignificant part has come out of the business here already. The business, meanwhile, and the retail line on the other income line will be driven hopefully by a range of benign factors, no doubt, stemming in part from some of the current account guidance that I gave you in the comments earlier on where we are seeing volumes increasing and if the regulators do have anything else in store then we'll see that in due course. But the specific point you made on overdraft fees, we feel has been very substantially dealt with.

Chris Cant -- Autonomous -- Analyst

Thank you.

Operator

Thank you. Your next question comes from the line of Benjamin Toms, RBC. Please proceed.

Benjamin Toms -- RBC -- Analyst

Good morning, thanks for taking my questions. I've got just a follow up on Chris' point around NIM. I know you've been cautious on giving guidance for 2020. But I think you've already given guidance this morning, you expect 2020 NIM to be, continue to be resilient around 290 bps. What does this assume in terms of rate cuts or rises in the UK over that period?

And secondly on acquisitions, you purchased the lend portfolio from Tesco, are there other potential bolt-ons that you may be considering? Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Sure. Okay, thanks. I should be clear then on 2020 guidance for 2020 is going to be given at the year-end results, ie the 2019 year end results when we present them in 2020. Any guidance on 2020 is going to be given then. The arithmetic on NIM, I hope I've been clear on in that earlier conversation or question from Chris. Hopefully I gave insight into the building blocks that I think makes sense from a NIM perspective and I'll leave you to kind of draw your own conclusions from that and -- but perhaps that's all I can say on that point.

Second point Tesco and other similar acquisitions, we'll look at acquisitions as they sort of come on the market as it were. And if there are acquisition opportunities that make sense from a shareholder value point of view, then we will take them. And the way that we look at shareholder value here is very much a combination of what value can we get from conventional M&A point of view, to what extent does it allows us to increase flexibility as to our organic strategy, is there a franchise perspective, whereby we gain customers that we welcome into the Group.

All of those factors, If you like, get taken into account. Our strategy to be clear, is an organic led strategy where a particular discrete M&A opportunity comes up and we think it makes sense, we will look at it.

Benjamin Toms -- RBC -- Analyst

Can I just follow-up briefly on that? So just in relation to the email sent to analysts this morning where you say margin resilient around 290 bps in 2020, is there potential for that items to be revised at the full year?

William Chalmers -- Executive Director and Chief Financial Officer

No, I think they are resilient around 290 just to be clear and I think we have precisely 288 as a precise number, is a 2019 reference I'd be very, very clear about that.

Benjamin Toms -- RBC -- Analyst

Okay. Thank you

Operator

Thank you. Next question comes from the line of Fahad Changazi, Mediobanca [Phonetic]. Please proceed.

Fahad Changazi -- Mediobanca -- Analyst

Hello. Just, just one quick follow-up on the insurance operation, actually. Could you perhaps give us how much -- tell us how many bulk annuity premiums have you [Indecipherable] up to in the nine month stage and/or are you still confident of hitting your GBP2 billion target for the full year. And just to follow up on the asset side of bulks, are you saying it's getting more competitive for sourcing higher yielding assets to finance small business? Thanks.

William Chalmers -- Executive Director and Chief Financial Officer

Fahad, I'm sorry, but would you mind repeating the first question, I didn't hear it properly?

Fahad Changazi -- Mediobanca -- Analyst

Sure. Are you still on track or feel confident of hitting your GBP2 billion bulk annuity premium sort of guidance, soft guidance you've had in the past?

William Chalmers -- Executive Director and Chief Financial Officer

Okay. Okay, thanks. I think on both -- I think we issued guidance as such, it's just too precise really for guidance to be given on but to give you some idea on our 2019 views, we see it ebb and flow, to be honest. There is quite a lot of supply on the market and that comes with small boats opportunity, if you like, and it comes with large ones. And because it is by nature lumpy, you will see it kind of go up and down on a quarterly basis. We signed a few -- we are signing a few, I should be -- I shouldn't prejudge it too much, but we're signing a few in Q4, you will see therefore, perhaps a bit more in Q4 than you saw in Q3.

And as to the total quantum of that, I don't want to put a number on it. And as I say, I don't want to sort of guide too specifically on such precise items but we'll seeing a couple more in Q4 than we did see in Q3.

And on the illiquid [Phonetic] assets point, it's a good point. I mean, the supply of bulk come to the market for a whole variety of reasons that you're aware of, is a sort of, strong steady flow and I think that is going to continue. Because companies just don't want these things on their balance sheet.

At the same time, you [Indecipherable] make sense of acquiring bulk risk if you got the assets to actually make margin off of and those need to be illiquid and they need to be long-term in order to match the responsibility, reliability that you're taking on. Those -- we are very careful, if you like, to ensure that illiquid assets that we bring on to the business, it doesn't matter where they're located in the bank or an insurance company or anywhere else for that matter, are consistent with our risk appetite. And so when we look at the market, we do so through that lens and to an extent at least therefore willingness to take on bulks will be constrained both by our willingness to, if you like, adopt front-end pricing and also constrained by our willingness to take on illiquid assets to back them and that will, I talked about as a constraint, but that's also the opportunity, but we will apply strict sense of risk to spin around it.

Fahad Changazi -- Mediobanca -- Analyst

Okay, fair enough. Thank you.

Operator

Thank you. Next question comes from the line of Ed Firth KBW. Please proceed.

Ed Firth -- KBW -- Analyst

Good morning everybody. I just have two questions, firstly, just in terms of your cost target. I think if I got my math right that implies that underlying costs in the fourth quarter of about 1850 [Phonetic] something like that, because you've got the, I guess, you've got the banking levy coming through in Q4. So that's quite well below the run rate that you've been running so far this year. And I guess two questions, one is, first is, is my math right?

And secondly, it always surprises me the extent to which banks seem to be able to cut costs, whatever revenue comes up short and I'm just wondering if you could just share with us some thoughts about where that is and I'm thinking particularly, are you having to constrain investment now in order to hit sort of consensus numbers or have you just got spare costs that happen to be taking them out and I'm just trying to get a sense as to how it is that you can bring that number down. That was my first question.

And then the second question was on capital. I guess, we're all now talking and looking intensely at Basel IV and I think consensus seems to be suggesting you're losing about 200 basis points of core Tier 1 something like that. Can you give some indication, is that the sort of number you're thinking about, what are the sort of variables, when can you give us a sort of more persistent or almost a confident number I guess and what might that do in terms of implications for your target?

William Chalmers -- Executive Director and Chief Financial Officer

Sure. Okay, thanks, Ed. You said, it's two questions. But I'm sure there are more than two questions.

Ed Firth -- KBW -- Analyst

The Capital One...

William Chalmers -- Executive Director and Chief Financial Officer

Okay. On the cost target, the new cost guidance that we're bringing out, if you like, for 2019 is the 7.9 for the year as a whole. I don't want to go too specifically into what that implies for every given line item within that, the banking level you were right comes into Q4 and that's fair. I will give more detail if you like on exactly how that breaks out at the end of the year, but the guidance is for the cost base as a whole in the context that I've given.

Ed Firth -- KBW -- Analyst

But it is -- sorry, just to be clear, is this sort of the projects that you can delay into next year, is that the way you do this or you think just the people have spend less money?

William Chalmers -- Executive Director and Chief Financial Officer

No, it's simply a function of some of the cost management techniques that I mentioned earlier on, the auctions are an example, contract to staff is another good example, contract to staff are kind of all under the banking sector, they're also very expensive. And when you bring some of them in to the bank you significantly cut their costs and there are 35 initiative for next year, perhaps it helps a little bit in that respect as we seek to bring more contract staff in as permanence. And the investment point is an important point. We actually see the investment point as an opportunity from a cost perspective, we have very much maintained and protected our investment line over the course of the GSR3 period and look to do so next year, I mentioned earlier on our GBP1.7 billion investment to date. We've not had an opportunity because there are a number of investments that we look at both this year and next and then beyond, then go to reducing the cost line, decommissioning is one example, there are a number of others. But the point of investments in part at least is to allow us to run the business off of the lower cost base going forward. And that's an important point. So, no, we're not cutting into investments and we do in fact see it as an opportunity as we manage cost base going forward.

And the Basel IV point you mentioned, I'm going to leave that for another day. We're not giving Basel IV guidance that's consistent with what we've done for some time. It's because it's a little way off, as you know. It's also because there's still a range of uncertainties about how Basel will be applied. And so we don't really want to get into a kind of guessing game as to what will happen in Basel.

Ed Firth -- KBW -- Analyst

Any idea when that will be a bit clear? I mean, obviously a number of European banks now are giving guidance and I mentioned a lot of them have got quite significantly more complex business than yours and I'm just -- it's just -- I mean it's not you alone, just all the UK bank seems to be sort of just like wishing it away. I'm just trying to get a sense as to when we might have some clarity on that.

William Chalmers -- Executive Director and Chief Financial Officer

I think you should go and ask the PRA.

Ed Firth -- KBW -- Analyst

Okay.

Operator

Thank you. Your final question comes from the line of Robin Dunn [Phonetic], HSBC. Please go ahead. You're live in the call.

Robin Dunn -- HSBC -- Analyst

Good morning, William. Long time no speak [Indecipherable].

William Chalmers -- Executive Director and Chief Financial Officer

Thank you, Robin.

Robin Dunn -- HSBC -- Analyst

Just a couple of quick ones. One, the easy one, if you could give us the average deposit rates in the quarter that would be quite helpful. And the second one, I hate to come back to the fee income side but because if we look at this year and sort of pencil coming into Q4 and allow for sort of GBP400 million of exceptional kind of one-off type things in the first half, we're going to get to around kind of 53[Phonetic] or so, it does make the consensus for next year at 59 [Phonetic] look a little bit tricky and I take on board, what you're saying about potentially seeing a better market's performance next year versus this year. I just wondered if you could tell us, I guess you probably got about GBP1 billion of other income and commercial banking year-to-date, if you could give us some sort of ballpark as to how much of that is markets so that we could sort of try and scale, what the upside might be from that.

William Chalmers -- Executive Director and Chief Financial Officer

Okay, thanks,Robin. Average deposit rates, I won't be too specific on in terms of the price, I mean, safe to say there are some elements of the fixed book that are higher, if you like, in other aspects of the deposits and that to an extent is helpful. I think that's consistent with what's been said before. The fee income point, it's really just, as said, a function of four main areas. The commercial, what may come back in markets and we've had frankly very weak market performance because I think most of the banks have also, in fact, the investment banks, a bit more than us, but it also affect us, because we have a decent sizable markets business. That, as I said earlier on, we expect to come back, it's simply a question of when investment phase return, if you like. The insurance business is the second point, and as I said that has decent strong, I would say, secular growth drivers behind it, not just in insurance, but also in the wealth area, that is supplemented by some of the experience changes, longevity changes which you saw in the first half of this year, I think you saw in the first half of the year before that, and let's see what that holds for the first half of next year, but the patent is there, if you like. So that's another piece. Overall, retail, I described to be steady, which I think is fair. We're also seeing a growing retail business in the liability side, as I mentioned earlier on, and then other Q3 has basically zero or low single-digit, let's call it, gilt gains within it.

It is also off the back of, as I said before, relatively tough comparison from an LDC perspective. So there are reasons why one might expect that to be a little different going forward. So without giving guidance, which again is a year-end matter, early 2020 matter. You must do what you want to do, but there are reasons as to why we think and, if you like, taking Q3 and annualizing it is you should be cautious before you do that.

Robin Dunn -- HSBC -- Analyst

I agree, I fully understand that. I'm just trying to sort of scale the opportunity from markets returning to perhaps a more normal level, whether that's a kind of a GBP100 million sort of upside or GBP200 million upside and unfortunately first nine months this year, I don't think we've got any disclosure on how much of this sort of commercial bank fee income is market related.

William Chalmers -- Executive Director and Chief Financial Officer

Yeah. Well, Robin, I've probably gone as far as I can go and my point really, safe to say that there is a market opportunity, which is as to the opportunity, on its phase. There are also a range of opportunities that stem from that, I mentioned hedging earlier on, as an example of that type of thing. I won't go any further to put numbers on it, but I hope it gives you a sense of the issues that we're looking at.

Robin Dunn -- HSBC -- Analyst

Great.Thanks, William.

William Chalmers -- Executive Director and Chief Financial Officer

Thanks, Robin. Okay. I think we're going to wrap up, but thanks again to everybody for taking the time to attend the call, hopefully it was useful and I look forward to engaging further with you going forward. Thanks very much indeed guys.

Operator

Thank you, ladies and gentlemen, this concludes the Lloyds Banking Group Q3 2019 Interim Management Statement Conference Call. For those of you wishing to review this conference, a replay facility can be accessed by dialing 0 (800) 032-9687 within the UK 1 (877) 482-6144 within the US or alternatively use the standard international on 00-44-20-7136-9233. The access code is 127-2231-8. Thank you for participating.

Duration: 70 minutes

Call participants:

William Chalmers -- Executive Director and Chief Financial Officer

Jason Napier -- UBS -- Analyst

Rahul Sinha -- JP Morgan -- Analyst

Joe Dickerson -- Jefferies -- Analyst

Fahed Kunwar -- Redburn -- Analyst

Andrew Coombs -- Citi -- Analyst

Chris Manners -- Barclays Research -- Analyst

Martin Leitgeb -- Goldman Sachs -- Analyst

Guy Stebbings -- Exane BNP -- Analyst

Jonathan Pierce -- Numis Securities Limited -- Analyst

Chris Cant -- Autonomous -- Analyst

Benjamin Toms -- RBC -- Analyst

Fahad Changazi -- Mediobanca -- Analyst

Ed Firth -- KBW -- Analyst

Robin Dunn -- HSBC -- Analyst

More LYG analysis

All earnings call transcripts

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