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Lloyds Banking Group PLC ADR (LYG -0.08%)
Q3 2020 Earnings Call
Oct 29, 2020, 5:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Thank you for standing by and welcome to the Lloyds Banking Group Q3 2020 Interim Management Statement Call. At this time, all participants are in listen-only mode. There will be a presentation by Antonio Horta Osorio, and William Chalmers, followed by a question-and-answer session. [Operator Instructions].

I will now hand the conference over to Antonio Horta-Osorio. Please go ahead.

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

Good morning everyone and thank you for joining our 2020 third quarter interim management statement presentation. I will give a brief overview of our encouraging business recovery in Q3, with a return to profitability in the quarter, followed by how our digital transformation is creating new opportunities for the Group, and being recognized as market-leading by our customers. All this, while we continue to strive for a more inclusive and sustainable future. I will then hand over to William to run through the financials, and we will have time for questions at the end.

I will turn first to our business recovery in the quarter on slide 2. Despite a challenging operating environment, and while significant uncertainties remain, we have seen the open mortgage book grow by GBP3.5 billion in the quarter and with a 22% share of approvals. This represents the highest volume of growth in approvals in a quarter, since 2008. We have also continued to see retail current accounts growing ahead of the markets through the third quarter, and Group deposits are now GBP35 billion higher than at the end of the year.

We have seen a significant change in financial performance in Q3, with a return to profitability. This is largely due to impairments, but also to an increase in business volumes and has enabled the Group to deliver a return on tangible equity of 7.4% in Q3. Given the better than expected macroeconomic conditions over the quarter and our ongoing optimization of the commercial book, we are able to enhance our 2020 guidance for both impairments and risk-weighted assets. William go through this in detail shortly.

The Group is also benefiting from our long-run investment in the business, and continue to focus on strategic execution. The benefits of our GBP2.6 billion of strategic investments, can be seen in our record digital engagement and satisfaction scores, as I shall line on the next slide.

So turning to slide 3 and how our recognized digital leadership position is creating new opportunities for the Group. We are the largest digital bank in the U.K., with 17.1 million digital active users, of which 12.1 million use our mobile apps. Up 1.4 million in the last nine months. We are very pleased with this continued customer growth and this is a clear strategic advantage, as those customers log on to that app 25 times per month, that is a total of 3.1 billion log-ons so far this year. This has enabled us to serve more customer needs digitally throughout a challenging period, and we have seen a 19% increase in products originating digitally this year. Importantly, this is not at the expense of quality, and our digital net promoter score is up 8% over the same period.

As you have heard me say many times before, our unique single customer view capability enables the Group to leverage our deep retail banking relationships, in order to support customers long-term savings needs. We now have over 6 million customers, who are able to use this unique functionality. Those customers viewed 16 million of the insurance and investment products, alongside a bank account every month, including pensions, home insurance, protection and share building. This is up 8% in the quarter, and over 70% of those views came through our mobile apps.

Our long-run investment in digital transformation, position the group well to continue to serve our customers through the pandemic. I have great confidence in the future of the Group and in its competitive position. We will maintain our relentless focus on supporting our customers and the U.K. economy, while we will continue investing for the future and developing our competitive advantages further.

I will now turn to slide 4 and outline how the Group is continuing to strive toward an inclusive and more sustainable future. We have adopted a proactive response to the coronavirus pandemic, and we are working closely with the government, our regulators and other stakeholders, to support customers and businesses up and down the country, as we help Britain recover, which is at the heart of the Group's purpose. We had particularly focused on mental health and well-being, while also committing GBP25.5 million of funding to our independent charitable foundations for 2021, which will enable them to continue their vital work.

We have all been deeply moved by recent events around the world, which have highlighted the vital importance of diversity, and how much we still have to do. We have announced our Race Action Plan, which will drive cultural change across the organization, while ensuring diversity of recruitment and progression. We have quantified our target to increase black representation in senior roles, and this is in addition to our existing diversity targets. This is clearly the right thing to do for our colleagues and for the benefit of the Group, but it is also important to note that Moody's has recognized the Race Action Plan as a credit positive, given improved diversity and reduced social risk.

Finally, on sustainability, we have announced an ambitious goal to reduce the carbon emissions we finance, by over 50% by 2030. At the same time, we have already met our internal carbon reduction target for 2030, so we are working on developing new targets. These actions and more are the right things to do, as supporting diversity and sustainability will directly pay to the recovery of the U.K. economy, from which we will benefit. This is fully aligned with the Group's long-term strategic objectives, the position of the franchise, and the interests of our shareholders.

That concludes my opening remarks. And I will now hand over to William, to run through the financials in more detail.

William Chalmers -- Executive Director and Chief Financial Officer

Thank you, Antonio, and good morning everyone. I'm going to give a run through of the Group's financial performance. As usual, we will then open up for Q&A at the end.

Turning back to slide 6 and an overview of the financials; the Group's resilient business model and the reduced impairment charge in the quarter has driven a return to profitability in Q3, with a statutory profit before tax of GBP1 billion. Net income of GBP3.4 million in Q3 is down 2% from the second quarter, largely due to the performance in other income. I'll come back to it in more detail later on.

NII is supported by net interest margin of 242 basis points, and a small increase in average interest earning assets to GBP436 billion. Costs remain an area of intense focus for the Group. The GBP0.04 reduction in total costs is largely derived from 5% lower BAU costs. The Group's cost-income ratio performance meanwhile, has clearly been impacted by the challenging revenue environment.

Pre-provision operating profit of GBP5 billion year-to-date included GBP1.5 billion in the quarter, and while this is down 6% on Q2, it still gives very substantial loss absorbing capacity. The impairment environment in the third quarter has been benign relative to expectations. The charge of GBP301 million, reflects a relatively stable macroeconomic environment and a significant reserving undertaken in Q2. I'll come on to this in more detail in a few minutes.

TNAV is up GBP0.006 in the quarter at GBP0.522 per share. CET1 ratio has increased to 15.2% or 14% excluding transitionals, both comfortably ahead of our targets in regulatory and capital requirements.

I'll now turn to slide 7 and look at how the Group's customer franchise performed in Q3. As Antonio mentioned, we've seen strong growth in the mortgage book in the quarter. And the open book is up GBP3.5 billion with a 22% share of approvals, building a strong pipeline looking into Q4. Based on that, we expect the open book performance in Q4 to be stronger than in the third quarter.

Consumer Finance has performed at the better end of expectations. I mentioned at the half year, that we expected balances to be down around 5% to 10% in the second half. Given the performance in Q3, we now expect balances to be closer to 5% down in H2.

In Commercial, we continue to see SME lending, driven by the government support schemes. We've now delivered about GBP8 billion of guaranteed lending, with a market share of 18%. Going the other way, Corporate and Institutional balances are down GBP4.8 billion in the quarter, as we continue to see clients pay down their RCFs, but we've also continued our work on loan returning relationships. Commercial RCF drawings are now back to the February level, having seen significant drawdown early on in the crisis.

Average interest earning assets are up GBP1 billion on Q2 and as mentioned looking forward to the fourth quarter, I would expect continued support for AIEA is from the strong growth in the open mortgage book.

As you've heard from Antonio, total deposits are now up over GBP35 billion in the year, a very strong performance. This growth has continued in Q3, indeed ahead of the market in retail current accounts. Meanwhile, commercial is benefiting from around 50% of support scheme lending remaining on deposit.

Turning now to net interest income on slide 8. NII is GBP8.1 billion year-to-date or GBP2.6 billion in the quarter. The Q3 margin of 242 basis points is in line with half-year guidance, and up a couple of basis points from Q2. In addition to better consumer finance balances versus expectations, we've also seen a full quarter's benefit of deposit repricing, and the benefit of significant low cost deposit growth, as well as overdraft charging starting to come back into the margin, consistent with the outline that I gave at the half year.

I've already mentioned the strong mortgage performance. New business mortgage margins are attractive and higher than maturing front book business. That attractive asset growth will continue to support AIEAs in the fourth quarter, and is thereby supportive of Group interest income, albeit slightly dilutive to Group margin.

The current low rate environment is also impacting the structural hedge, with the five year swap only around 7 basis points over three month LIBOR, we've been replacing maturities with shorter dated hedges. This strategy allows us to achieve income protection, while preserving flexibility. You see, the consequence of that approach in the now roughly two-year weighted average life of the hedge. In that context, hedge earnings of GBP1.1 billion or 0.8% over average LIBOR year-to-date, will likely continue to reduce gradually over time, if the curve remains flat.

Taken together, the better than expected real economy lending is currently offset in the fatter yield curve, and is supportive of interest income. Based on this mix, we expect AIA to be up, and expected margins to remain broadly stable at around 240 basis points in Q4, resulting in a full year margin of around 250 basis points.

Turning now to slide 9 in other income. OOI of GBP3.4 billion for the nine months, includes approximately GBP1 billion in Q3. This is clearly below our aspirations, and is due to the continued relatively low level of activity across our key markets. We've also seen an GBP80 million charge in respect to the asset management market review, following the FDA's review of pricing across the investment industry. With respect the divisions, Retail has benefited from a pickup in card spend and Q3 OOI is in line with Q2 and in an environment of relatively subdued levels of customer activity.

Commercial saw a lot of markets income versus Q2, given our U.K. focus and transaction banking activity remains subdued. Insurance continues to be impacted by reduced levels of new business, the AMMR charge and the non-repeat of the illiquidity premium benefit of Q2. Overall, while we expect other incomes remain subject to similar pressures in the fourth quarter, less the AMMR charge but potentially impacted by the annual review of insurance persistency assumptions. However, we are now around the base level, in which we would expect activity to start to recover in 2021.

We are investing in both resilience and in diversification in other income, including for example in our markets platforms, and payments propositions and commercial, as well as our products platforms, and the traded personal wealth joint venture, within insurance and wealth.

Now moving on to slide 10, and costs. You've heard about our intense focus on costs many times before, and this remains as important as ever. Total costs have come down by 4% year-on-year, including a 5% reduction in BAU costs. This has been achieved despite deferring all corona based restructuring activity, for a number of months this year, resulting in higher than expected average headcount, albeit with lower bonus accruals.

Remediation of GBP254 million for the nine months has increased by GBP28 million year-on-year. This reflects charges across a number of existing programs. I expect it to be higher in Q4, given these very small historic conduct programs coming to an end. Overall, the cost in 2020 is likely to end up above our ongoing expectation of GBP200 million to GBP300 million per annum.

Our current record of ongoing sustainable cost savings has enabled continued investment in the business. We've invested a total of GBP1.6 billion so far in 2020 and made a strategic investment of GBP2.6 billion over the life of the GSR3 program to date.

Investment spend has been adapting to the pandemic situation, but we remain absolutely committed to investing in the long-term success of the Group, especially in our digital capabilities. The benefit of this investment has been particularly evident during the pandemic, as you've heard from Antonio earlier on. While investment will remain a priority for the Group, we continue to expect operating costs to be below GBP7.6 billion for the year.

I will now move on to impairment, on slide 11. The impairment experienced in Q3 has been benign, given the better than expected macroeconomic environment and the continued presence of government and customer support schemes. The impairment charge of GBP301 million for Q3, recognizes this benign picture, and overall, holds the expected credit loss steady. This is consistent with our update to the economic outlook and the frontloading of our reserving taken in Q2.

The retail charge of GBP398 million in the quarter is only a little above the pre-pandemic run rate, and in commercial, we've not seen any significant charges this quarter. Importantly, the retail charge includes a management overlay of GBP205 million. This is taken to offset provision releases that our model generates as a result of benign arrears experience in Q3. We have taken the judgment, that arrears and losses have been kept low by the range of customer support measures available, and hence it would not have been appropriate to recognize larger provision releases at this point.

As mentioned, we've also updated our forward looking economic assumptions. Forecasts are reprofiled, but unchanged in the longer term, essentially maintaining our view of a significant slowdown in activity, but delaying much of it, by about a quarter into 2021. It also recognizes some of the better performance that we've seen in Q3.

This update results in a modest release of GBP105 million, largely reflecting the benefits from higher HPI in 2020. It's also worth adding that we slightly refined our triggers for staging in cards, leading to GBP1.4 billion of up-to-date balances, moving to stage 2 and an associated increase in provision of GBP40 million.

Given all of this, our stock of ECLs remained broadly stable at GBP7.1 billion. A pick-up of GBP0.5 billion on our base case ECL and providing significant protection against potential future credit impairments. The ECL continues to reflect a range of economic scenarios, including a severe downside weighted at 10%, and incorporating peak unemployment of 12.5% in Q2 2021.

Assuming no further changes to our economic scenarios, the front-loading of our provision under IFRS-9 in H1, means that we now expect the full year impairment charge, to be at the lower end of our GBP4.5 billion to GBP5.5 billion range. The caveat of no material change to our economic scenarios is important, given the obvious uncertainties.

Now moving to slide 12; I will touch on how we have maintained our reserving across business lines. As I mentioned, the GBP3 billion increase in expected credit-loss provisions in the first nine months, means that we now have an ECL provisions stock of GBP7.1 billion. This provides significant balance sheet resilience, while current write-offs remain in line with the pre-crisis levels.

Overall, balance sheet coverage of 1.4% is in line with the half year. Within that, mortgages are 0.6% and with increased coverage on the cards book from 6.3% to 6.7%, including 44% on stage 3. We maintained our proactive charter policy on card of four months in arrears. Indeed, if we charged off after an additional 12 months, in line with some of our peers, our pro forma overall cards coverage will be closer to 9.1% with stage 3 at 69%.

I'm now going to look briefly at the Group's exposure to certain commercial sectors on slide 13. The commercial portfolio has been subject to careful risk management in recent years. Around 17% of total medium and large corporate exposure is to investment grade clients, while around 90% of SME lending is secured. Within this, our exposure to the sectors most impacted by coronavirus is modest in the context of the Group. It's only around 2% of Group lending, or around 12% of commercial lending.

There has been a total reduction in the exposure these impacted sectors during the quarter. As mentioned, commercial RCF drawings have fallen by around GBP2 billion in Q3. This means that the full GBP8 billion, which was drawn down at the beginning of the crisis, has now been repaid and RCFs are back to pre-crisis levels, further reducing our balance sheet risk.

Finally, on commercial; our commercial real estate portfolio is reduced by GBP0.4 billion since the half year, while maintaining its average LTV of 49%, with over two-thirds below 60% LTV.

I'll now move on to payment holidays on slide 14. The vast majority of payment holidays -- first payment holidays have now matured with around 82% of customers now repaying, up from around 70% at the half year. In total, payment holidays have been granted around GBP69 billion of retail lending, with today less than GBP15 million outstanding, including GBP2.4 billion of initial payments. Our market share of mortgage payment delays is now below our national market share.

Around 30% of extended mortgage payment holidays have also now expired, with around 90% resuming payment. As mentioned at the half year, the cohort of extensions across products is of lower credit quality, with higher balances and it is also worth noting, that around 35% of outstanding payment holidays are already in stage 2. Indeed, moving the remaining population of extensions across all assets to stage 2, we generate an incremental ECL of less than GBP100 million.

Early arrears are low, at just under 4% of mature payment holidays. This includes missed payments and notably around half of the mortgage and motor Finance arrears were already in arrears at the start of their payment holiday. Briefly on SME capital repayment holidays; over 90% of secured lending, and while maturities remain at low levels, we are seeing a similar picture to retail.

Now moving down the P&L, to look at the below the line items on slide 15. Restructuring is broadly in line with prior year-to-date, but up significantly on Q2, as the Group resumed previously halted severance plans and property rationalization work in Q3. This will continue, and we expect another quarter of relatively high restructuring charges in Q4.

Volatility and other items in the quarter, include positive banking and insurance volatility, partially offset by the normal fair value underlying charge. PPI provisions are again zero in the quarter and we remain happy with the circa 10% model conversion rate, and with the unutilized provision of GBP328 million. Year-to-date tax credit of GBP273 million reflects the DTA remeasurement benefit in Q1, and taxable losses thereafter. As a result of all of this, we ended the statutory profit after tax of GBP707 million for the year-to-date and GBP688 million in Q3. The return on tangible equity as Antonio said, is 7.4% in the third quarter.

Now moving on to capital on slide 16. Our CET1 ratio of 15.2% is comfortably above both our internal capital target, and our regulatory capital requirements, around 11%. It acts as a substantial protection against potential credit impairments. CET1 continues to benefit from the temporary addition of 121 basis points of IFRS 9 transitionals. We had previously expecting up to half of the in-year increase to unwind with staging reasons [Phonetic] in H2. But this is now looking unlikely. We still expect to see this unwind, in essence move in stage 3. But this is now likely to be more of a 2021 story.

We've also had a 16 basis point benefit in Q3 from lower RWAs. Partly because we've managed RWAs better, and partly because we have not seen expected credit migration. Again, while we still expect to see this migration take place, we now expect this to be a largely next year event. Therefore, on the basis of our macro forecast for 2020, we now expect RWAs at year-end to be been broadly stable on Q3. In total, CET1 is up 64 basis points in the quarter, which is strong, albeit this is clearly helped by the RWA reduction and further transitional benefit in quarter.

Looking forward and subject to regulatory approval, we see a circa 50 basis point benefit from a potential change in the treatment of software intangibles in Q4. This is higher than our previous expectation, given the change in potential amortization for over three years. On capital requirements, we will hold to our ongoing CET1 target of around 12.5%, with a management buffer of around 1%. This means that we are comfortably above both our internal target and regulatory capital requirements. As usual, the Board will consider any capital return at year-end, when they look at all available information, including and in particular, the economic outlook, as well as capital levels and regulatory requirements.

Finally, turning to slide 17; strong growth on both sides of the balance sheet has enabled us to offset the impact of the challenging rate environment. Together with a stable economic environment, this has contributed to a return to profitability in Q3. The Group's solid pre-provision profitability, prudent reserving and enhanced capital strength, gives significant loss absorbing attribute. It also means that we are in a strong position to support our customers, despite the ongoing uncertainty.

As mentioned in the relevant areas and based on our economic assumptions, we've updated guidance for 2020 impairment and risk-weighted assets. You can see a summary of our guidance on the slide in front of you.

In conclusion, we have great confidence in the future of the Group. We will emerge from this crisis, having learned a great deal about the organization, our customers and new ways of working. Whatever the future brings, we will maintain our focus on supporting our customers and U.K. economy. This is the right thing to do, and is in the best interest of the Group and our shareholders. We remain well-positioned to deliver long-term superior and sustainable returns.

That concludes the presentation for this morning. And we're happy to take your questions. Thank you for listening.

Questions and Answers:


Thank you. [Operator Instructions]. Your first question comes from the line of Rahul Sinha, J.P. Morgan. Please go ahead. You're live on the call.

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

Good morning Antonio. Good morning William. A couple of questions from my side, essentially the same topics that we've been discussing on the calls for the last few quarters. I am going to start with NII; obviously pleasing to see the recovery in the quarter, and I hear you on the pickup in average interest earning assets. Can I just ask, how much of this recovery is driven by your intention to take a greater share of the mortgage market, given pricing trends have improved, versus just the sort of pent-up demand related boost that we are seeing in the mortgage market right now, which might peter out next year? So I'm just trying to understand, whether you think structurally pricing might have improved now sufficiently, that you can actually operate at a higher share, and if you could give us some numbers around what sort of share are you comfortable with, that would be really helpful.

And then the second one just on non-NII, you know, I'm still struggling with the consensus off about GBP5 billion of non-NII for 2021, looking at what you've delivered, and I do accept you have called, that it has probably bottomed out now. Could you help us, since I am trying to understand, what are the growth drivers from here, you [Indecipherable] sort of GBP1.1 billion run rate, what bridges the gap from that sort of run rate to the sort of GBP5 billion plus of consensus expenses. Thank you.

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

Good morning Rahul. Maybe I'll start to give you an overview of the mortgage markets, to explain the environment of your question on NII, and William can build up on the specific numbers you mentioned also, on OOI.

So in terms of the mortgage market, and you will remember -- as you said, we discussed this many times before, that we had adopted in the last few years, a prudent strategy in relation to the mortgage markets. We thought that prices were not where we would like to see them, and we have therefore privileged capital and margins and risk versus volumes, and we basically held our open mortgage book, stable.

Prices have improved from the start of the year, as we discussed previously and they have continued to improve. And therefore, given our absolute focus on helping Britain prosper or recovery in this case, and being the largest mortgage lender in the country, we have been supplying the needs of our customers on mortgages, and this has been very, very strong on Q3, as you heard and it has been quite strong across the board, to your question. So this is both on first-time buyers and on home movers, and I think that this basically is an outcome based on three factors. The first, as you mentioned, there was some pent-up demand to satisfy. Secondly, it is also a fact that we have strong incentives on people to buy again, as you said as well, of the stamp duty expiring next year. But thirdly, there is a significant change in customer behaviors, people have been on one hand, saving more, as they have spent less on traveling hospitality, and they have saved more in general. And secondly, they have, as you know, most people spend much more time at home, and therefore their home became somewhat more valuable to them, and they are strongly moving homes across the board and wanting to go into larger homes outside cities, with gardens if possible. So it's both the first-time buyers and the home movers, that are driving this significant demand in mortgages, and that is, in my opinion, a structural change in behaviors from people. So you have all of these three effects. And this is quite important.

Our market share of approval has been 22% at target, which is the highest we have had since 2008. So within these conditions, and with very strong customer demand, we have been absolutely meeting those customer needs, to give you an idea on first time buyers, our market share has been even higher at 24%, and given that there is, as you know, a time lag between applications and completions of around three to four months, we already know that we will have an even stronger growth in the open mortgage book in Q4, even we already know the applications that we got. And therefore this is a changing trend. We are the largest mortgage lender in the country as I said. We have a very strong capital position, therefore we are absolutely supporting our customers and the supply and the mortgages that they need, and this is very important to sustain NII, and it has more than offset, as William said, the impact of the low yield curve. William, can you comment on the other income question?

William Chalmers -- Executive Director and Chief Financial Officer

Thanks Rahul. First all on other income in Q3 what we see. As you can see from the release today, we had GBP988 million, which completed an AMMR charge of roughly GBP80 million, which in turn means that we are around GBP1070 million, if you take out that that AMMR March charge. I think in terms of answering to your question, I obviously won't comment on consensus for next year, that's a matter for next year, not for today. But it's important to give a little context about what's in that OOI charge and to a degree, what's not in there. What do we see, we saw relatively flat performance in retail. Retail continues to be subdued off the back of modest activity, and in particular limited travel. We saw commercial banking performance, relatively affected by our U.K. focus on markets, which was down on the quarter two performance. And we saw insurance modestly performing off the back of, such as the AMMR charge, but also some GI claims from weather events in August, and absence of bulk activity and very limited new business in terms of some of our areas, such as workplace, where the coronavirus impact is clearly taking its toll on new business schemes, as well as things like protection activity.

So when we look forward for OOI, it is very activity sensitive, and to the extent that you see things like return to travel and retail, for example, things like a bit more activity in U.K. markets for example. Things like a bit more activity in some of the insurance value streams that we have. Then you would expect OOI to respond to that. I think added to that on a secular basis, we're making a number of investments, as I mentioned in my comments earlier on in the OOI stream, in order to build the non-interest streams within the business. So examples of that might be packaged bank account propositions in retail, might be the transaction banking platform in commercial and cash management. Likewise, the protection platform, the GI platform within insurance, and those investments over time will build this income stream.

I think your final comment, Rahul is, as I said before, this will be gradual. It's not going to change overnight, but it is activity sensitive, and it is also the subject of ongoing investment.

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

Great. Thank you very much.


Thank you. Next question comes from the line of Aman Rakkar, Barclays. Please go ahead. You're live in the call.

Aman Rakkar -- Barclays -- Analyst

Morning gents. Could I ask a couple please. So first on mortgages; interested in what your application experience has been in October? Is it OE? And are we seeing a similar level of robust performance, as you've observed in Q3, and does that give you any indication on drawdowns and completions in Q1? I'm just trying to work out, how much this kind of volume dynamic is, is a tailwind into next year? As part of that, could you help us understand the kind of front and back margin dynamic on the open book, presumably it's a nice tailwind now, but if you're able to quantify that, that would really help? Another one on capital if I may, so it's good to see the upgraded guidance in RWAs which is good, it might be a matter of timing. I just wanted to come back to -- you know the regulatory headwinds that you guys have called out before, about GBP6 billion to GBP10 billion. I think you noted that number lower. I was interested in what's your best estimate of that, and how much of that is captured in this year, versus is expected to come through next year? I guess I'm just trying to get a sense on the RWA inflation that might be coming next year, as a combination of RWA pro cyclicality, but also the RWA regulatory headwinds that might be coming? Thank you.

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

Right. Thank you very much, Aman. I will elaborate on your first question in terms of the Q1 and applications, and William can take the second one on front and back book and on capital.

So, just to complement what I'm saying to how -- we haven't seen any significant different behavior in October from customers. We always, as you know, we constantly adapt our prices and strategies according to our multi-brand strategy, depending on demand. And especially on the intermediary channel, we are quite agile in terms of adapting. But from a demand point of view, we haven't seen any significant change in behavior in October.

I think relating to my previous points that as the stamp duty incentives deadline gets closer, you might have an additional rush into people that want to take advantage of that. And for people to take advantage of the stamp duty, they will more or less have to submit their applications by the end of the year, as you know, in order to take advantage, next year from the deadline. And then after that, of course, that incentive will disappear. So, you should expect that to disappear, but a bit later on.

On the other hand, the structural impact, I told you about the customer behavior and people structurally investing more on their houses and wanting to have better houses, given they spend more time in the houses, I think it is a more structural demand point. So, this would be the additional feedback and color I could give you on these points.

William Chalmers -- Executive Director and Chief Financial Officer

Thanks, Antonio. Thanks, Aman, for the question. On the mortgage margin question, first of all, what we're looking at there is completions taking place at around 160 basis points versus 140 basis points on maturities. But also having said that, applications are more like 190 basis points and above in Q3. So that gives you a sense as to the margin and the trends on the mortgage front.

You asked about RWAs. The RWA's picture for next year, again, is really a matter for next year's guidance, which we're not giving on this call. But two or three factors that are perhaps worth bearing in mind in that context. When we look at RWAs going forward, I called out credit migration as a point in my comments earlier on. We haven't seen that in Q3. We don't really expect to see it on the basis of what we've seen so far in Q4. So, it's perhaps more of a next-year event, contingent upon your view of macroeconomics.

You asked about regulatory headwinds there. The only significant regulatory headwind that we see in 2021 at the moment is counterparty credit risk, which we will call out in the early part of next year. That's modest, but it's there. Then offset against that, we'd expect our Commercial business, in particular, to continue with its ongoing optimization, just as it has done this year. And that will then lead in combination to our picture for RWAs during the course of '21. But again, we'll give more guidance on that in '21 rather than today.

Aman Rakkar -- Barclays -- Analyst

Perfect. Thanks a lot. Can I just clarify then, so does it sound like that GBP6 billion to GBP10 billion isn't happening in the way that you thought it was before? Or is it that actually you digested a decent chunk of it this year, and there's only a little bit more to come next year?

William Chalmers -- Executive Director and Chief Financial Officer

I think -- again, it's a matter for guidance probably at the beginning of next year, but it's more a question of timing, I suspect, and the particular issues that are being referred to.

Aman Rakkar -- Barclays -- Analyst

Okay. Thank you.


Next question comes from the line of Guy Stebbings, Exane. Please go ahead. Your live in the call.

Guy Stebbings -- Exane -- Analyst

Good morning. Thanks for taking the questions. Can I come back to NII, actually, please, and just on NIM quickly and sort of the exit rate this year and thinking into next year. I mean, it's just about the multiple references you've made today on stability in the margin. I think if we look into next year, clearly, the hedge will be a meaningful drag based on prevailing rates. Looks like, obviously, much more secured than the over unsecured lending. And then we got the interesting dynamic on spread widening on mortgages, which maybe dissipate somewhat, but probably is still a net positive into next year in terms of back to front book. I mean, is it just that mortgage back to front book, which is enough to provide stability into next year? Or is there something else going on? Or we're -- actually are we looking at 240 exit rate and maybe a bit of pressure from that sort of level as we think into next year?

And then on volumes and average interest-earning assets, we've ended the quarter about GBP2 billion above the average for the quarter. Consensus this year is GBP433 million and then GBP435 million next year, and we're somewhere above that already and you've got the good pipeline into next year. So, I'm just trying to work out, is there anything you can see that should persuade us from thinking that actually we're running somewhere above that into 2021? Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Thanks very much, Guy, for the questions. Maybe dealing first of all with the margin picture. I'll start off with what we've seen in Q3. As you saw, the Q3 margin ended at 242. That's consistent with the guidance that we gave at the half year. Within that, we saw a couple of positives and a couple of negatives. The positives that we saw were deposit repricing, number one, and the removal of interest-free overdrafts. Chargeable balances, for example, were up 65% in the context of Q3. Against that, we saw a couple of negatives. The structural hedge was one of them. And the second was around asset mix, which is to say unsecured balances came a lot -- off a little bit, as I called out in my comments earlier on. And mortgages, while they are very good for net interest income, by virtue of the comments that I made earlier, are a little bit dilutive to the group margin.

The margin picture looking forward into Q4 is going to be subject to similar factors, and that's why we're calling out margin stability into Q4 with the positives being a full quarter of deposit repricing, a full quarter of the interest-free overdraft coming to an end and indeed to reduce funding costs from things like our drawdown in TFSME.

The negatives, again, weren't surprising. They're very similar. The structural hedge has about GBP10 billion of maturities in the remainder of 2020. Again, we'll see a little bit more attrition in unsecured volumes, albeit that's slowing down. And we'll see a boost in mortgages, just as Antonio was commenting on earlier on, which, again, is great for NII, but a little bit dilutive to margin.

That gives you a picture as to the margin. I think looking beyond that, again, guidance is really a matter for 2021, but you can see the factors at play in Q4, which are going to be not totally dissimilar.

The important point here comes to your second question, which is what's going on in AIEAs and the driver of that to net interest income. We've seen in the context of Q3 the strength in mortgages. We have seen the -- that offset, if you like, the unsecured balances from an AIEA perspective. And we've seen Commercial, a combination of Bounce Back Loans going up and RCFs coming down, which more or less nets out.

When we go into Q4, we're going to continue to see the mortgage growth based upon what we're seeing today in the pipeline, and that continues to grow. We're going to continue to see a little bit of unsecured attrition, just as I commented on the margin earlier on. Overall, that leads us to the view that AIEAs will continue to increase from what they are today into the year-end.

To the extent that we see those patterns continue in the course of 2021, and again that's a matter for 2021 guidance, but you can see where we head off at the end of this year. With a stable NIM, that is good news, obviously, from an NII perspective.

Guy Stebbings -- Exane -- Analyst

Okay. Very, very clear. Thank you. Perhaps it's an obvious point, but I get the sense that in the past, there was perhaps more emphasis placed on net interest margin, whereas given the environment we're in, it feels like NII should really be what we're a bit more focused on rather than just simply the headline NIM. Is that a fair way that you're thinking about it more these days?

William Chalmers -- Executive Director and Chief Financial Officer

Yes. I think it is. But I think it is important to say that it's in the context of making sure that we do things that are in the best interest of both customers and shareholders and we are in the context of relatively attractive mortgage margin pricing.

Guy Stebbings -- Exane -- Analyst

Okay. Thank you.


Thank you. Next question comes from the line of Chris Cant, Autonomous. Please go ahead. You're live in the call.

Chris Cant -- Autonomous -- Analyst

Good morning. Thank you for taking my questions. Just on the structural hedge. You mentioned in your remarks, you talked about the net contribution for the nine months being GBP1.1 billion, I think it was. If I look at your hedge disclosures for 3Q and the equivalent disclosure at the 2Q stage, in the nine months, you say GBP1.1 billion; in the six months, was GBP600 million net contribution. So, we're at about GBP500 million net contribution for the third quarter, specifically annualizing to about GBP2 billion. And if there is any rounding there that I'm misunderstanding that would be -- it would be a helpful clarification. But if we say the GBP2 billion, two-year average life on the hedge, are we basically looking at a headwind of about GBP500 million per annum from the 3Q NII level? And if you could also give us a number on the hedge maturities next year specifically, that would be helpful. Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Yes, sure. Thanks for the question, Chris. The structural hedge, it's important, first of all, just to make sure that we refer to the right benchmark. So, there is the structural hedge and absolute income, if you like, which is around -- so far year-to-date is around GBP1.8 billion. There is some structural hedge contribution above and beyond LIBOR, which is obviously a lower number because you have to subtract LIBOR from that GBP1.8 billion number. So, just by way of reference, it's important just to, if you like, benchmark against the right context.

In terms of the look forward, the -- I mentioned that we have GBP10 billion maturities in the context of 2020. What we have been doing, as I mentioned in my comments earlier on, is in the context of very low rates, we have been trying to preserve earnings stability and to preserve value, just as we always do with the hedge. And that has led us to a strategy of short-dated hedging, which protects against further downside, for example, should, not our base case, but should we see negative interest rates emerge, we are protecting ourselves against that downside by virtue of the short-dated hedging, but at the same time we're preserving optionality, if you like, if the curve kind of resumes back to normal by, again, making sure that the hedging is appropriately short-dated.

Looking forward -- this is your second question, but it's part of my answer to the first. Looking forward, because of that short-dated hedging, we see slightly more maturities in 2021, and we're now looking at a number of around GBP60 billion in 2021 maturities for structural hedge.

As you look at that on a roll forward basis in terms of the headwinds, as you're referring to it, that we have over the life of the hedge, just over a two-year weighted average life, but importantly an average life of the hedge that is more like five to six years. And so, when you think about the structural hedge, as it rolls off, if we see a flat rate curve, then that's the type of -- it's that five- to- six-year parameter that you should be thinking about.

In terms of the headwind on an annualized basis, a couple of things that I'd caution against really. One is that the hedge profile is relatively lumpy, number one. Number two is that we will, in the interest of preserving earnings stability and shareholder value, be, just as we always are, careful about when we deploy the hedge in order to ensure that we achieve those objectives, which one would hope would abate some of the headwinds that you're referring to.

The further point that I would make and more kind of strategic structural, which is that we're in a low interest rate environment, I suspect that we are seeing some pricing moves. We've been talking about mortgages quite extensively this morning that are offsetting some of the effects of that low interest rate environment. So, you have to think about the industry response, I think, to the low rate environment that we have, which is driving the structural hedge, but it's also driving some benefits in other product markets. We're in a rational, relatively well-ordered market, and I think when you think about the dynamics in our P&L, that's important context.

Chris Cant -- Autonomous -- Analyst

Understand completely on the other moving parts. And if I could just come back to the numbers point, though, I understand you did give the gross numbers as well, and perhaps I missed that, perhaps you were speaking to the gross. But if I'm thinking about the contribution of the hedge NII, it's about GBP2 billion annualized in 3Q, the NII generated from the hedge. I think that's right. I mean the gross number you give is GBP1.9 billion. For the six months, it was GBP1.3 billion. So, the gross contribution in 3Q is GBP600 million. The net contribution is GBP500 million. The LIBOR component is about GBP100 million, which checks out versus your average hedge balance. But if I think about how much NII you would lose if the entire hedge just rolls into this very flat curve environment, which is essentially GBP2 billion annualized over the life of the hedge with, by the sounds of it, quite a chunk of that hitting in next year.

William Chalmers -- Executive Director and Chief Financial Officer

I think the numbers that you've given for the performance year-to-date, Chris, are not terribly different to the numbers that I see. They're slightly different, but not much. Obviously, we won't comment on next year beyond what I've already said.

Chris Cant -- Autonomous -- Analyst

Okay. All right. Thank you.


Thank you. Next question comes from the line of Martin Leitgeb, Goldman Sachs. Please go ahead. You're live in the call.

Martin Leitgeb -- Goldman Sachs -- Analyst

Yes, Good morning. I just wanted to ask you on the potential impact of negative rates and how you see negative rates. I think the Bank of England had that bank to comment on whether they're ready for a negative rate of the system. So, the first question, is Lloyd's ready? And do you think the broader market is ready as of now? Meaning that anything could at least operationally come in the near-to-medium term?

And then maybe to the question on mortgage pricing, but related to mortgage pricing, what are the levers banks have left to address the impact of potentially lower rates? Is there anything left in terms of repricing on the liability side? Or could there be a scenario where banks increasingly look at asset pricing in order to try to find an offset to potentially lower rate? Thank you.

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

Thank you very much, Martin. Look, in relation to negative rates, I think we should bear in mind two factors. So, there is an operational side and the financial side. What the Bank of England said and the governor and Andy Haldane just last week is that the bank wants to have negative rates in their tool kits. And for them to be in their tool kits, obviously that has to be operationally feasible.

So, we are in discussions with the Bank of England about how to make that feasible, how long does it take and what are the steps to make that part of their tool kits. So, that's one point.

The second one is about, financially, is the bank -- has the bank changed their mind about their view on interest rates. Both the governor and then Andy Haldane said, they haven't changed their mind. Andy Haldane just said last week that most likely the bank, if the bank decided to do something else, they would resort to additional QE before thinking about anything about negative rates.

And so, I'm just repeating what the governor said and what Andy Haldane said. And we are on that phase, where operationally we are discussing with the bank what it would take to enable the tool kits to be available for the Bank of England.

In terms of pricing and William will want to comment, I'm sure. Just a comment I would advance you to make.

I mean, as you know, and as I said in one previous question, we have been prudent throughout the last few years in terms of the mortgage market, as we thought pricing was not where we thought it should be sustainably, considering capital, risk volumes and other considerations. And now that mortgage margins are more stable and in a more rational environment almost for 12 months now, I would see it's frankly very difficult why that environment would change.

While we still have significant uncertainties out there, there is significant demand, as we discussed. And there is a different risk premium going forward, especially for high LTVs. So, I would see that difficult to change in the current economic environment.

William, I don't know if you want to add.

William Chalmers -- Executive Director and Chief Financial Officer

Well, just to address the second of your two questions there, Martin, which is around liabilities, and it was inherent in what Antonio said as well. The liability margin is -- won't surprise you, relatively modest right now, not just for us, but I'm sure for the sector as a whole, given where interest rates are. In that context, it is interesting actually that some of the support to Q3 margin was indeed through liability repricing, as I mentioned in my comments. Looking forward, it's more about asset repricing. So, that's a point looking forward, if you like.

I think one point that is worth making is that liabilities pricing being low is a function of where we are in the rates curve. That, in turn, means that I suspect most of the opportunities going forward from the asset side of the balance sheet.

Martin Leitgeb -- Goldman Sachs -- Analyst

Thank you very much.


Thank you. Next question comes from the line of Andrew Coombs, Citi. Please go ahead. Your live in the call.

Andrew Coombs -- Citi -- Analyst

Thank you. Perhaps if I could stay on the same theme, looking at mortgage dynamics, and thank you for the numbers on the margin on completions versus maturities and applications.

Just on that theme. In the discussions you have with the Bank of England, it's been quite interesting in the dynamics this year, in that really the mortgage rates have been a function of supply and demand, whereas in the past we've really seen the pass-through of lower rates on to the mortgage market. You've just indicated you think that the scenario or the environment is likely to remain similar.

So, a big picture question here that in the discussions you have with the Bank of England, when they are talking about the prospect of further rate cuts potentially moving to negative rates, what we've seen this year is that hasn't passed through to the mortgage market and hasn't passed through to the end consumer. In fact, it's going the other way, mortgage rates are higher. So, did that disincentivize the Bank of England from introducing negative rates? There's been any discussions you've had with them on that transmission mechanism?

And then a second question is more of a boring number one. At the first half stage, you gave the aggregate gross margin on consumer and on customer deposit. So, I think it was 681 on consumer and 20 bps on customer deposits. Could you just give us the updated number, please?

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

Okay. Andrew, I will comment on the first, and William will comment on the second. I mean, just to point, I would add to what we have been discussing, Andrew.

In terms of conversations with the Bank of England, the conversations have not been about implementing negative rates themselves, as I said to you, but they are about what it would take for us banks, in general, all of us, to be ready to operationally implement them, should they decide to do it.

So, we are on the operational phase, as I said. The Bank of England wants to have this available in the tool kit. For it to be available, it has to be feasible, it has to be implementable. And we are on that phase that if they were minded to discuss additional monetary policy measures, they would probably first resort to additional quantitative easing.

So, our conversations, to be very clear about that, are about implementation and driving the tool available, not about the change of mind of the bank in terms of whether they want to implement it or not.

On the second point, which connects to the first, I understand, Andrew, about passing that to consumers. Well, they have been passed to consumers. I mean, as rates went from 75 basis points to 10 basis points, we and most of the banks have lowered their FCR rates exactly by the amount that base rate has passed. And that is an immediate very substantial impact, which was passed to consumers.

New business price has fluctuated over the years. It has increased a little bit from the beginning of the year in terms of margins, but given the decrease in terms of base rates, prices for consumers are lower than at the beginning of the year, but you have to look at the different segments, etc. But on average, you have to distinguish which was the impact on absolute prices, which has into consideration the decrease on the base rate and what the dynamics of the market. There is very substantial demand, which I think will continue and will continue both because of the incentives for the -- taking advantage of the stamp duty, lower stamp duty, until the beginning of next year, that is going to continue.

And apart from that, there is a structural shift in customer behavior, which is also driving demand up very substantially. I mean, we have never had so many approvals, as I told you, since 2008, and we are the largest player in the segment. So that's quite important. The mortgage prices, in general, are in -- more rational opinion, in our opinion and -- more rational position, in our opinion. And I really don't see given both the demand factors I mentioned to you, the uncertain results there and the risk factors that high LTVs, I don't see that changing in the next one or two quarters.

William Chalmers -- Executive Director and Chief Financial Officer

I'll just maybe add one comment to Antonio there, Andrew, and then go on to address the second of your two questions. I think it is our view that the regulator realizes or the Bank of England more appropriately realizes the profit impact, if you like, or the concerns around negative rates from a financial sector point of view as a general matter. I think, therefore, the -- as Antonio says, we have passed on mortgage rate -- in mortgage rates, rate reductions that we've seen so far.

Going forward, I suspect that the Bank of England will be sympathetic in terms of the form in which negative rates might get introduced. In order to ensure that, if you like, bank sectoral profitability concerns are addressed. We'll see, that's obviously in the realm of slight speculation. But I suspect there is an understanding and a desire to avoid necessarily significant negative impact from introduction of negative rates if they get that.

Second point, on your gross margin point on consumer. The -- we won't give that just because I don't want to get into the business of giving detailed 3Q disclosures along the same lines as we give at H1. We'll save those for the half.

There's been, as a general matter, as a trend matter, there's been a very modest amount of pressure on the Consumer Finance margin, but I won't go into more detail beyond that.

Andrew Coombs -- Citi -- Analyst

Okay. Thanks. Just a quick follow-up then on that consumer margin. Given the dynamics you're seeing in the credit card market, and obviously it's probably -- it is largely a mix shift effect that have weighed on that gross margin on the consumer book. Do you think that will now stabilize in terms of mix effect going forward?

William Chalmers -- Executive Director and Chief Financial Officer

Well, I think our margin, as I mentioned at the half year, is very dependent upon activity levels, in general, and what that does to the unsecured book. So, if one sees a resumption in activity during the course of 2021, which would be our expectation, then you would expect to see that feeding through into the margin.

Andrew Coombs -- Citi -- Analyst

Okay. Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Thank you.


Thank you. Next question comes from the line of Jonathan Pierce, Numis. Please go ahead. You're live in the call.

Jonathan Pierce -- Numis -- Analyst

Hello, folks. Two questions, please. The first is just a clarification on that hedge maturity number. Did you say GBP60 billion next year? And if so, is that relatively smooth set of maturities through 2021? That's the first question.

The second question is on capital. I mean everything you're telling us suggests we get a small profit, probably again in Q4. You got software benefits. Risk-weighted assets are flat. It feels like the equity Tier 1 ratio probably ends the year up toward 16%. And even if I fully load to your severe downside scenario, would only be at sort of 13%. I know it's difficult to comment on, but can you see any good reason now why the regulator wouldn't let you turn distributions back on, particularly given you've been lending into the important markets as well through the course of 2020?

William Chalmers -- Executive Director and Chief Financial Officer

Yes. Thanks, Jonathan. On the first of your three questions, the hedge maturity, I won't give a detailed breakdown as to the timing of that during the course of 2021, but the number of GBP60 billion is the right number, roughly GBP60 billion for next year, but again I won't go into detail about how exactly that breaks down.

The second of your question is around capital performance. The capital performance for the remainder of the year is obviously macro-dependent. I mentioned how you might see our P&L and one or two of the trends within that in the course of my prepared remarks. We would expect to see continued capital build, but with that macro dependency. You mentioned the software exemption. I think we need to see where the PRA goes on that and what it decides to do.

What does that all mean for the distributions question, the third of your questions. The organization, I think, entirely recognizes the importance of dividends to investors. We also see ourselves, as you've commented. And we've also agreed with, we have a very strong capital position, both with and without transitionals. That is clearly appropriate given the uncertainties that we're in, the macroeconomic uncertainties, the ones that we know about.

The distribution ultimately is a question for the Board at the end of the year based upon -- and I'm sure a number of considerations, but the types of things I would expect it to consider would obviously be the capital strength and the evolution of that position, would obviously be the macro outlook and where we stand and would obviously be the regulatory position and what the regulator would like to see us as a sector do. So again, that's a question for the Board at the end of the year, but those are the types of considerations I would expect it to debate.

Jonathan Pierce -- Numis -- Analyst

Okay. Thank you.


Thank you. Next question comes from the line of Frederique Sleiffer, KBW. Please go ahead. You're live in the call.

Ed Firth -- KBW -- Analyst

Yes. I think my name has been changed. So, it's Ed Firth here. But I'm happy to go under Frederique, if that helps.

The -- no, I just had a question about the economic environment because it seems we're in a, sort of, slightly several world at the moment, where all the banks, not just you, are delivering very low impairment numbers. And yes, if I'm reading my newspaper, we're reading that France is going back into lockdown, Manchester in lockdown, Nottingham in Tier 3, etc. So, I guess my question is, insofar, as you can, in those areas of the U.K. that you have seen in lock -- that going back into some form of lockdown, and I think in places like Manchester, I guess, is the most obvious one, how has the book performed in those areas? And can you see a sort of marked differential between those areas versus the rest, which might give us some indication of what would happen if the whole of the U.K. goes back into some form of lockdown? I suppose that's my first question.

And then my second question related to that is if we do see some form of sort of greater lockdown in Q4, would we expect that to be reflected in Q4 provisioning? Or would your first call be to utilize some of the impairments you've already made rather than adding to them further?

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

Okay. So, I will take the first question and then William will take the second one. Look, it is -- very frankly, I mean, it is still too early to see, to your example, whether, for example, the Manchester lockdown would have had any significant different impact on the book because I mean we are speaking about weeks. So, it is really difficult to know about that.

What I would say are probably two things. The first one is I mean the government measures of support to the economy are absolutely the right ones there. First, because as we have discussed in previous quarters, obviously it keeps a productive structure ready, that whenever the pandemic effects dissipate, that productive structure can immediately be used and not have to be reset. Of course, as we move into the pandemic, the government has then rightly so again, driven more targeted help to the sectors that will continue to operate post pandemic and has looked differently at sectors, which has structural impact from the pandemic.

But overall speaking, the impact of supporting the sectors with a very significant external and expected shock is the right thing to do. If you have not spent that money in that way, you would spend it through unemployment benefits, lower taxation from corporations that kept operating, etc., etc., and you would not have the flexibility of going this quickly after the pandemic into production. That's the first important point.

But the second important one, I think, which has been less discussed is that this support, not only to businesses as I was just mentioning, but to individuals as well, through the furlough scheme, has also enabled people and businesses to adapt with the transition period, if you want, and to plan. And that's what you see by unsecured debt having decreased. So, individuals have decreased their leverage as they save more and as they spend less, which is reflected in the balance sheets of the banks by lower and secured balances. And that makes those individuals more resilient to an expected -- to the fact that they might lose their jobs going forward, and some will, unfortunately, lose their jobs going forward. But they have had, number one, they are in a stronger situation financially.

And secondly, they have -- they are having time to plan ahead for those uncertainties, which is also really important in terms of not having an unexpected shock. So, I think that is -- those are two important points that I think you should bear in mind.

A third one I would add, relating to us specifically, because you're mentioning impairments, and I'll ask William to comment in a moment, is that you should bear in mind that us being a retail and a commercial bank, it is not really important what we do in the six months previously to a shock like this one or doing the shock itself. What is really relevant for retail and commercial bank is what you have been doing for the past five years and the cohorts of loans you have been putting into the books. And as you know, we have -- since the start, we have always said we wanted to build a low-risk, simple, digital financial institution based on the real economy in the U.K. So, we wanted to build a low-risk bank. And we have, as we have discussed with you through several years now, we have taken that view sustainably.

For example, to give you an example, on mortgages, it was already five years ago that we had decided to lower our activity in mortgages in London and Southeast by decreasing the loan to incomes from five to four in order to deemphasize our focus on that part of the market. And when you look at the slides we gave you in the appendix, the situation of our mortgage book, again, just to give you a factual example, is completely different than before.

So, if you look at 2010, you see that the bank had GBP145 billion of mortgages above an LTV of 80%. And after 10 years, we only have GBP25 billion. And if you look above 100% LTV, when prices have gone down in certain areas of the country, we have less than GBP1 billion of mortgages over 100% LTV, in spite of that, when 10 years ago, we had GBP45 billion and our equity is around GBP40 billion to give you an example.

So, I think it's really important to bear in mind in our specific case that we have been building a low-risk bank that's focused on prime businesses over many years now, and that's what most of our book is now after so many years.

William, would you like to go to the second question?

William Chalmers -- Executive Director and Chief Financial Officer

I'll address your second question, Ed. The start point is probably just to better understand what's in and what's not in the IFRS 9 provision as we see it today. So, our forecasts currently include some measure of localized lockdowns, but also an end to government support as it was articulated at the end of Q3.

Now, if you look at what we're seeing today, it could be that the lockdowns get a bit worse. We'll see how that transpires over the coming weeks. But it's also the case that government support is a bit better than we have previously anticipated. So, there's a bit of a net effect there and some positives and negatives going on.

As we look forward into the future, you asked if we end up in a more adverse macroeconomic situation, does that cause a change in our IFRS 9 impairment provision? Or do we dig into the provisions that we already have? It's perhaps just important to step back and say our IFRS 9 impairment provision is constructed based upon the macroeconomic forecast that we have given you. If those macroeconomic forecasts change, then so will our IFRS 9 impairment provision.

Now having said that, it is important to recognize that the macroeconomic forecasts are a net forecast based upon potential future impairments driven by coronavirus scenario, but offset by whatever government measures may be taken to soften those blows. So, our macroeconomic forecasts rest upon a net of those two. And we'll have to see if there are any changes going forward, what the net impact, if you like, of those two is.

Coming back to Q3, within Q3, as I said, we've seen pretty benign arrears experience. We have more or less maintained our ECL, now at GBP7.1 billion. And indeed, within that, we've had to work pretty hard to offset releases driven by the model to maintain that prudent stance. So our position right now, we feel very comfortable with, based upon macroeconomic assumptions as given to you today.

Jonathan Pierce -- Numis -- Analyst

Right. Okay. Thanks so much indeed.


Thank you. Due to time constraints, we have one final question. It comes from the line of Benjamin Toms, RBC. Please go ahead. You're live in the call.

Benjamin Toms -- RBC -- Analyst

Hi. Thanks for taking my questions. Two, please. Firstly, in relation to the PRA consultation paper that was published last week, which includes a proposed change to the rules in MDAs, if the paper would be implemented in its current form, does that have the potential to change the way the management thinks about its 1% management buffer?

And then secondly, do you expect to recalibrate your property cost footprint following the crisis? Or is it still too early to say? Thank you.

William Chalmers -- Executive Director and Chief Financial Officer

Sure. Thanks very much for the question. I think on the first of those two, our ambition with capital, as we've demonstrated today, is to stay very comfortably ahead of any MDA or other regulatory constraints. As we stand today, we've got a BAU regulatory requirement of around 11%. The capital ratio today is 15.2%. So, there's obviously a very substantial buffer there. I think we would always look to manage the business comfortably in excess of whatever regulatory hurdles there may be.

On the property portfolio, I think that as we look forward, one of the things that we've done in our restructuring charge, and we'll continue to do, is look at the overall property estate. And to the extent it makes sense in the context of new ways of working, in the context of some of the learnings that we're taking out of the coronavirus environment, we will adjust that property portfolio accordingly.

Again, we've done a little bit of that in the course of 2020. And as we look forward, we'll clearly be planning on what is the appropriate property network in the current environment.

Benjamin Toms -- RBC -- Analyst

Thank you.


[Operator Closing Remarks]

Duration: 75 minutes

Call participants:

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

William Chalmers -- Executive Director and Chief Financial Officer

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

Aman Rakkar -- Barclays -- Analyst

Guy Stebbings -- Exane -- Analyst

Chris Cant -- Autonomous -- Analyst

Martin Leitgeb -- Goldman Sachs -- Analyst

Andrew Coombs -- Citi -- Analyst

Jonathan Pierce -- Numis -- Analyst

Ed Firth -- KBW -- Analyst

Benjamin Toms -- RBC -- Analyst

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