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Lloyds Banking Group Plc (NYSE:LYG)
Q2 2021 Earnings Call
Jul 30, 2021, 10:30 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 2021 half-year results call. [Operator Instructions] There will be a presentation by William Chalmers, followed by a question-and-answer session. [Operator Instructions] I must advise you that this call is being recorded today. I will now hand you over to William Chalmers. Please go ahead, sir.

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Thank you, operator. And morning to everyone, and thank you for joining our half year results presentation today. I'll shortly turn to an overview of the progress the group has made in the first half of the year on strategic review 2021. I'll then give an overview of our solid financial performance and the continued business what we see in the first half. As usual, there'll be plenty of time at the end for Q&A, which I'll be joined by Jon Burgess, our Deputy Group CFO. Turning first to slide two. During the first half of the year, we delivered for our customers, and we remain determined continue to support them in the current recovery. We're making good strategic progress. We're building a franchise, and we have delivered continued solid financial performance.

The group's balance sheet and capital position is strong, underpinned by capital build of 93 basis points in the half. This has enabled the Board to announce an interim ordinary dividend of 0.67 pence per share. As we look forward today, over 18 months since the start of the pandemic, we're seeing some signs of economic recovery and have updated our forecast accordingly. In this context, given our performance and the macroeconomic backdrop, we are enhancing our guidance for 2021. This includes a stronger NIM outlook for 2021 and a lower credit charge, in turn, resulting in a slightly higher cost base since we accelerated rebuild of variable pay. Together, this leads to a return on tangible equity of circa 10% ahead of previous guidance.

We also expect RWA to be below $200 billion. I'll now turn to the strategic progress that we've made during the first half of the year, as shown on slide three. We are making good progress on strategic review 2021. The current evolution of our strategy that sets out clear execution outcomes for the year, underpinned by long-term strategic vision. As you know, our purpose is to Helping Britain Recover. Within this in 2021, our focus on helping Britain recover has been in the areas where we can make the most difference, and we have delivered in the first half. We expanded the availability of affordable and quality homes by lending around GBP nine billion first-time buyers, almost reaching our target for the full year. We've already exceeded our target for social housing sector funding for the full year 2021.

We supported over 48,000 businesses in start up, out of our 75,000 targets for the full year. And we're also delivering on our objectives to create a sustainable and inclusive future as well as making progress toward our diversity goals, we were recently ranked fifth in the financial times inaugural list of Europe's climate leaders. Turning now to our customer ambitions on slide four. During the first half we made real progress across our core business areas, delivering growth while increasing customer satisfaction and enhancing our product capabilities. We've delivered increased transaction tools for both personal customers and businesses, further improving our record all channel MPS to 71. We've grown the open mortgage book by more than GBP12 million, our strongest half year early growth in over a decade, as we've supported customers in their housing preferences in the post pandemic context.

We've also improved our position across core markets products, as our GDP rate ranking improving from 10th place to 6th. As you know, enhancing our wealth offering is a core element of our customer ambitions. In the first half, we delivered GBP four billion of net new money in insurance and wealth, reflecting a 7% annualized growth rate. And this morning, we're excited to announce the acquisition of Embark, a fast-growing investment in retirement platform business with assets under administration of around GBP35 billion, on behalf of circa 410,000 customers. This acquisition completes the group's wealth proposition by enhancing our capabilities in the attractive mass market and self-directed wealth segments, while also significantly strengthening our offering and accumulation and retirements, important growth markets. Embark's existing business and technology capabilities, will enable the group to deliver a modern, leading direct-to-consumer proposition.

A new platform services for our share dealing business in the IFA sector. The acquisition, therefore, provides strong growth potential. We're targeting a top three position in the individual pensions and broaden market by 2025 as well a top three position in the self-directed advice market in the medium term. Stepping back, Embark is entirely consistent with and supportive of our strategic review 2021 targets. Indeed, we're increasing our 2023 net new money target from GBP25 billion to circa GBP40 million to reflect our now increased growth potential. Embark will also contribute toward our ambition to build income diversification, which is particularly valuable in a low rate environment. We're targeting a mid-teens return on invested capital in the medium term, including all integration and restructuring costs.

I'll now look our focus on enhanced capabilities and strategically 2021 on slide five. Strategic Review 2021 identified for capabilities that are critical to sustainable success, technology, payments, data and ways of working. In the first half of the year, we've made steady progress in all these areas. In technology, we continue to improve our digital offering to customers, including bringing new features and updates to the market more quickly and more efficiently. In the first half of the year, we safely migrated around 120,000 customer accounts to our pilot new bank architecture. This is less than the 400,000 originally planned, but it's sufficient to provide the necessary proof point for our investments, build confidence for our cloud plans and to allow work to progress. On payments, we're on track to deliver a threefold increase in the number of clients on boarded to our cash management and payments platform.

We have also maintained our leading card spend share in line with targets. We're continuing to improve our use of data migrating 45 million customer records for cloud hosting. This was another important proof point. And finally, in respective ways of working, we are preparing for around 80% of our colleagues to be working in a hybrid manner in the future. This provides scope for efficiencies in our office footprint with circa 3% reduction delivered in the first half and on track for a full year reduction of 8%. I'll now move from strategy to our operating environments in terms to the U.K. economy on slide six. As mentioned, we are beginning to see signs of an economic recovery, although uncertainties clearly remain. GDP and growth expectations have both picked up over the quarter. Business confidence is rising strongly as are expectations for staffing levels over the coming year.

Together, these are key indicators for the SME sector, which, of course, is very important to us. In March, the coronavirus to retention scheme was extended to the end of September. This provides a significant level of support for people across the U.K., where notably, fewer people are on furlough than a year ago. We're also seeing spending recover. Combined credit and debit card spend is now above pre-pandemic levels, although not yet translating into credit card balances given high repayments. So while there's uncertainty around virus development and what will happen when furlough ends, we are nonetheless seeing positive trends. I'll now turn to the financial update beginning on slide eight. Financial performance of the business has been solid in the first half, with Q2 consolidating trends established in Q1.

Net income was GBP7.6 billion and is recovering up 2% from the prior year and up 8% from the second half of 2020. NII of GBP5.4 billion is supported by higher average interest-earning assets of GBP441 million, and a margin of 250 basis points, which has further strengthened in Q2. Other income of GBP2.4 billion is up 18% from the second half of 2020, although this is partly due to some nonrecurring items, which I'll explain shortly. Net income also includes a GBP271 million operating lease depreciation charge in the half. This is below our typical run rate, but broadly in line with our expectations for the rest of the year, given the continuing strength of used car prices. Operating costs continue to be a focus, and our cost income ratio is market-leading at 54.9%. We are also accelerating the rebuild of variable pay, which adds to costs, but reflects our stronger-than-expected financial performance.

We also saw a higher remediation charge in the half. This primarily relates to the historic insurance renewals fine, the threading re review and other ongoing legacy programs. Underlying asset quality is strong. Combined with the improved macroeconomic outlook, this supports the net credit in the half of GBP656 million. Taken together, statutory profit before tax was GBP3.9 billion, significantly higher than prior year and a solid recovery. As part of this recovery, we've seen continued balance sheet growth and capital momentum in the half with our CET1 ratio now at 16.7%. I'll expand on this point shortly. Now let me turn to slide nine and cover the net interest income developments during the half. Both average interest earning assets and net interest margin were up on the second half of 2020. As you can see on the slide, the strong mortgage book growth was again the main driver of the AIEA growth.

Looking forward, while we expect growth to moderate, we have a solid mortgage pipeline for Q3 and in line with our macroeconomic assumptions, expect a modest recovery in unsecured balances in H2. This means we continue to expect low single-digit percentage growth in average interest-earning assets in 2021. The H1 margin of 250 basis points was up six basis points from H2, while the Q2 margin of 251 basis points was up two basis points in the quarter. In H1 2021 versus H2 2020, lower structural hedge income and the impact of lower card balances were more than offset by the benefit from continued optimization activity in the commercial book, strong deposit flows and liability management benefits. Looking forward, the mortgage market remains attractive, but we are seeing pricing becoming more competitive, and we will continue to be disciplined in our approach.

We also expect increased structural hedge income, improved funding and capital costs and a modest growth in unsecured lending, which I mentioned, to support the group margin in the second half. So all taken together, we now expect the NIM to be around 250 basis points for the full year. Turning to slide 10 and the lending performance and asset margins a bit more detail. I've talked about the strong mortgage performance that we've seen, particularly the growth in the open book. Completion margins have been around 175 basis points in Q2, which remains above front book maturities, although it is down from the 190 basis points that we saw in Q1. on the back book, we've seen SCR attrition increase slightly to around 15%.

However, given a smaller book, the absolute reduction in the size of the backbook is broadly comparable to prior periods. As you can see on the slide, consumer finance volumes have largely stabilized in the second quarter, but are still down on prior year, particularly in cards. This is clearly the impact to margin. However, notably, card volumes ended Q2 in much the same position as Q1, showing balance reductions have now leveled off. In Commercial Banking, the margin in H1 has benefited from an improvement in the asset mix as well as ongoing pricing actions. So now let me move to slide 11 to look at deposits. Profits have increased significantly in the first half of 2021, up GBP23.7 billion as we continue to see inflows to our trusted brands. In retail, we've seen inflows from new and existing customers.

Average current account balances have increased by almost 40% since 2019 given reduced customer spending and higher levels of savings. Commercial deposits are up GBP3.7 billion in the half, although this includes a temporary pickup in legal accounts in June for mortgage volumes, before the phased resumption of stamp duty. The significant increase in deposit balances, which is now GBP63 billion since the end of 2019, gives the group further opportunities to serve customers through our enhanced wealth offering, including today's acquisition of Embark. It also increases our pool of hedgeable balances. The deposit margin of 15 basis points was broadly in line with the second half of 2020 and continues to support a lower overall group funding cost. I'll now turn to slide 12 to look at the structural hedge in a bit more detail.

As you heard in Q1 in the context of our continued success in attracting deposits, we increased the structural hedge capacity by GBP15 billion to GBP225 billion. Hedge capacity has now increased GBP40 billion since the end of 2019, which is prudent given the deposit growth we've seen over that same period. We've also acted upon favorable yield and reinvested a notional balance up to GBP215 billion, an increase of GBP29 billion in the half, including GBP eight billion during the second quarter. Our weighted average life of the hedge is now around 3.5 years, essentially in line with the position of Q1. As you can see, we've around GBP10 billion of unhedged capacity, along with GBP30 million of maturities there is, therefore, flexibility to invest depending on the environment and to ensure our objectives of earnings stability and shareholder value.

In H1, we see an income of GBP1.1 billion from hedgeable balances. Given our continued deployment into the more positive yield curve environment and the increase in the size of the hedge, we now expect earnings from this area to be stronger than previously estimated. Based on current market rates, the headwind we now expect in 2021 versus 2020 is circa GBP250 million. We do not expect to see a headwind in 2022 and only a modest headwind in '23. Now turning to slide 13 to look at other income. Other income of GBP2.4 billion includes GBP1.3 billion in the second quarter. This is clearly ahead of our recent quarterly run rate. The performance benefits by just under GBP100 million from gains in equity Investments business, a minor assumption changes within insurance.

When you exclude these elements, while lockdown restrictions continue to impact, we are nonetheless seeing some very early signs of recovery in the second quarter. Retail, for example, delivered slightly higher levels of activity led other income in Q2. And likewise, insurance and wealth new business saw a modest improvement in the quarter, particularly in workplace pensions and particularly on a volume basis compared to prior year. Commercial banking meanwhile was broadly in line with Q1 despite slightly softer markets related income. And looking forward, we do not assume the same level of equity and insurance gains, but we do expect underlying other income to gradually recover in the second half of the year, supported by increasing activity levels. We will also continue to invest organically in income diversification opportunities, which produce income over the medium term.

And now to cost on slide 14. Our market-leading cost income ratio of 54.9% continues to provide competitive advantage and remains fundamental to our business model. Operating costs for the half came in at GBP3.7 million. This is slightly higher than last year, reflecting the accelerated rebuild of variable pay, given the stronger-than-expected financial performance in income and impairments. Our focus on efficiency and cross discipline is unchanged. And it enables continued investment in the long-term success of the business. Looking forward, we now expect 2021 operating costs to be circa GBP7.6 billion. This increase from previous guidance takes into account the variable pay adjustments. And excluding the impact of variable pay, operating costs are developing exactly as expected at the start of the year.

Remediation of GBP425 million includes GBP91 million in respect of the regulatory fine for historical insurance yields, GBP150 million for operating costs in redress for HBOS Reading as well as charges in relation to other ongoing legacy programs. On HBOS Reading, we've now had the first few decisions from the independent panel rereview. As disclosed previously, there could be further significant charges in coming periods, albeit the exact timing and flow of these is uncertain. These remediation charges are clearly very disappointing, but we are working hard to make things right and put these issues behind us. Now turning to slide 15,. Asset quality remains strong and arrears remain low. While we continue to expect some deterioration, consistent with our macroeconomic forecast, underlying charges are currently below pre-COVID levels. In this context, commercial banking has also benefited from improved restructuring outcomes and lower balances.

The net impairment credit of GBP656 million in the half is bolstered by an GBP837 million release relating to our improved economic outlook. We believe our economic assumptions remain prudent compared to market expectations. And as a result of these changes, our stock of ECL has reduced to GBP5.6 billion. We have still around GBP1.4 billion above the closing 2019 level, and we've also retained our COVID-related management judgments. Indeed, these have increased in the second quarter to GBP1.2 billion, including the GBP400 million central overlay that we took in Q4 2020 relating to the significant uncertainty in the current environment. COVID-related management judgments also include circa GBP800 million held in retail and commercial, largely recognizing the potential delay in losses that we would have expected to see had support schemes not being in place during the pandemic.

Given the asset quality environment and the improvements to our economic assumptions, we now expect full year of the asset quality ratio to be below 10 basis points. Needless to say, uncertainty remains on the outlook. Now turning to the next slide to credit quality within retail. The group has a high-quality mortgage book, which continues to improve. The average LTV is now 43.1%, 94% of the book has an LTV of 80% or below. Our pre 2009 book is now GBP46 billion and has an average LTV below the wide book of 39.2%. As you can see, new to arrears remain low across our retail portfolios, at or below pre-crisis levels. And this is despite over 99% of payment holidays having expired. Moving to commercial on slide 16. We have a high-quality commercial portfolio with around 70% of exposures at investment grade. New to cases of below pre pandemic levels and currently falling.

Exposure to the sector's most impacted by coronavirus has reduced by GBP two billion over the last year and is around 2% of group lending. I note in this context that we've removed oil and gas from the chart, which can no longer justifies calling it an impacted sector. As you can see on the slide, there has been significant reduction in commercial stage two balances in the first half of 2021 from GBP14.3 million to GBP8.4 million. This is almost entirely within the upstate portfolio and is predominantly model-driven given our improved macroeconomic outlook. Stage three balances remain low and have reduced by GBP400 million during the half. Our commercial real estate portfolio focuses on lower risk property segments and has been substantially derisked and secured. Further risk mitigation is then achieved through significant risk transfers. I'll now turn to statutory profit on slide 18.

Statutory profit after tax of GBP3.9 billion and the return on tangible equity of 19.2% for the half were both significantly ahead of prior year. This benefited from higher underlying profit, lower below the line items and, of course, tax credit in Q2. Looking at the individual global line items. Restructuring costs of GBP255 million are significantly up on prior year and reflect the previously signaled high levels of spend in technology, R&D and in severance. We should see the benefits of this investment in our technology stack and financial performance over coming years. We've previously talked about restructuring being higher in 2021 than 2020, and that remains our expectation. The run rate is, therefore, expected to pick up in H2. Volatility and other items was favorable for the first half, benefiting from around GBP250 million of market gains within banking and insurance volatility.

Following the enactment of the increase in corporation tax to 25% in period '23, we recognized a P&L tax credit of circa GBP one billion relating to the revaluation of our deferred tax assets. As you know, the tax credit does not impact capital, but it is impacting profits and returns. Given the improved outlook for NIM and AQR and the updated operating cost guidance, we now expect the 2021 full year RoTe to be circa 10%. This excludes the circa 2.5 percentage point benefit from the tax credit just highlighted. Now moving to RWAs on slide 19. Risk-weighted assets reduced GBP1.8 billion in the half, helped by continued optimization in commercial banking offsetting asset growth. We've also seen limited credit migration to date, in part due to the impact of house price increases.

Looking forward, we now expect 2021 closing RWAs to be below GBP200 billion. I talked previously about regulatory RWA inflation, starting on the first of January 2022, and it's worth spending a bit of time addressing the changes that we anticipate. We expect GBP12 billion to GBP15 billion of inflation relating to CID four model changes and GBP three million to GBP five million relating to the standardized approach for countertrade credit risk. In total, therefore, we expect therefore we expect GBP15 billion to GBP20 billion regulatory RWA inflation on the first of January. We will, of course, also see underlying customer-driven balance sheet growth in 2022. And meanwhile, we will continue with our program of active RWA management over the course of next year.

This will provide some offset, particularly through continuing to optimize the commercial book. Second of these points together, our expectation for 2022 closing RWAs is circa GBP210 billion. Again, I would highlight that uncertainties remain. Looking briefly beyond close '22 and IWAS, the impact of Basel 3.1 in 2023 is expected to be broadly neutral. The reductions resulting from Foundational IRB changes are expected to offset increases across other areas. And as disclosed previously, the full impact of Basel 3.1 will likely not be felt until 2028. Turning to slide 20 and capital. Our CET1 ratio increased a net 50 basis points in the first half to 16.7%. 93 basis points of Capital Bill were partly offset by 37 basis points of dividend accruals and six basis points in respect of the revised levels.

As mentioned previously, the CET1 ratio includes circa 50 basis points from the change in treatment of software intangibles. The PRA has stated that they will repeal a revised treatment on the first of January 2022. CET1 also benefits from 78 basis points of IFRS nine transitional relief. We expect this to run down over the rest of this year and the early part of 2022 linked to macroeconomic developments and the model changes on the first of January 2022. Excluding the impact of both the software intangibles and all of the transitional relief, our CET1 ratio would be 15.5%. This is still significantly ahead of our ongoing capital target of circa 12.5% plus a management buffer of circa 1% as well as our regulatory capital requirement of circa 11%.

Following the regulator lifting restrictions on banks paying dividend, our strong capital position has enabled the Board to announce an interim ordinary dividend of 0.67 pence per share. The Board's commitment to capital returns remains unchanged. Our interim dividend reintroduces a progressive and sustainable ordinary dividend policy, the payments we made twice per year. Any decisions of our surplus capital distributions, as usual, will be taken by the Board at the full year. Looking forward, in addition to BAU capital evolution, we expect the acquisition of Embark in Q4 to consume circa 30 basis points on completion from a combination of price and restructuring and inspiration charges. And so finally, moving to slide 21.

To summarize, we supported our customers throughout the pandemic, and we remain absolutely committed to helping Britain recover. In the first half of 2021, we delivered good progress against our strategic priorities, continued business momentum and a solid financial performance. We have a strong capital position with a CET1 ratio of 16.7% offering an interim dividend of 0.67 pence per share. The group's solid financial performance in the first half as well as the improved macroeconomic assumptions enable us to enhance the group's 2021 guidance. We now expect the net interest margin to be around 250 basis points. Operating costs to be circa GBP7.6 billion. The net asset quality ratio to be below 10 basis points. The return on total equity to be circa 10%, excluding the circa 2.5 percentage point benefit from the change in tax rate.

And risk-weighted assets to be below GBP200 billion. In the medium term, we continue to target a return on tangible equity in excess of our cost of equity. And so in sum, although the economic outlook remains uncertain, the group's business model from financial strength will ensure that it can continue to support its customers and to help Britain recover. This is fully aligned with the group's long-term strategic objectives, the position of the franchise and the interest of our shareholders. Before closing, I'd like to say that it was my honor to be the interim Chief Executive over the last three months. I'm immensely proud of everything the group has done to support our customers and colleagues while helping Britain recover in these unique and challenging times. I very much look forward to working with Charlie when he joins in August. That concludes my remarks today. So thank you for listening. And Jon and I are now available to take your questions.

Questions and Answers:

Operator

[Operator Instructions] We will now take our first question from Joseph Dickerson from Jefferies.

Joseph Dickerson -- Jefferies -- Analyst

Hi, good morning. A good set of numbers there. Just on the COVID management adjustment of GBP1.2 billion, what hurdles do you need to see to release that? And is that something that you wouldn't expect to hold into 2022? And I guess what -- how would you put that to use if you were able to release that in terms of what would you prioritize?

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Thank you, Joe. The COVID related management judgments, as you know, in total, sum to GBP1.2 billion. That is a combination of the GBP400 million overlay that we put in place essentially as insurance under conditioning assumptions around our multi economic scenarios. And then GBP800 million of further adjustments relating to retail and commercial book. In sum, all of those adjustments, the entire GBP1.2 billion, are essentially related to judgments that we have taken to address potential shortfalls in the impairments that we would have seen, but for the government policies that have been in place, number one, the GBP800 million. And then for the GBP400 million overlay, as you know, it's essentially conditioning insurance against our base case assumptions proving wrong.

Whether that is in relation to the vaccine rollout, whether that is in relation to virus mutation? Or whether that is in relation to how unemployment adjusts in the post furlough period? And so I think, Joe, in answer to your question, what we'll be looking for in order to roll off those management judgments is essentially development in those factors. So as the vaccine rollout completes, number one, as we see further evidence of virus mutation or hopefully not, number two, as we see unemployment adjusting off the back of furlough changes in line with our expectations, number three, those factors will go to give us greater assurance in terms of the GBP400 million overlay. And then in terms of the GBP800 million other factors, we will see as to whether or not the losses that we have, if you like, accounted for in the context of those government core mechanisms actually transpire as the economy develops in the back end of 2021 and going into '22.

So I think those are the types of catalysts that will cause us to look at the management adjustments. Joe, I think, most likely, that takes place during the -- throughout the second half it is quite possible that it rolls into 2022, but that's very contingent upon all of the factors that I just mentioned. We'll look to be prudent as we address those issues going forward. In relation to what would we use that for, I guess a couple of points just worth bearing in mind. One is, to the extent those management adjustments -- sorry, management judgments are accounted for by essentially stage one and stage two ECLs, then essentially, they're accounted for in the transitionals that we have in the capital ratio right now.

And so to the extent those management judgments come off against stage one and stage two ECLs, we are effectively derisking our capital structure and removing a potential future drag on our capital structure as we look forward. So the capital position, if you like, looks stronger for it, but it's because transitionals just get solidified, if you like, in capital base. Clearly, to the extent that they are due to write-backs in stage three loan provisioning, then indeed, that comes back onto the capital -- sorry, onto the balance sheet as incremental capital, and that then strengthens the capital position above and beyond what we already have. In terms of our priorities as to how we would look to deploy that additional capital. As ever, we remain very committed as a Board to capital return to shareholders. We also remain committed to continuing to invest in the business in the right way to ensure its prosperity going forward. So hopefully, that's helpful to your question, Joe.

Operator

We will now take our next question from Raul Sinha of JPMorgan.

Raul Sinha -- JPMorgan -- Analyst

Good morning everybody. A few from my side. The first one really on capital. I just wanted to get a sense of what the Board would look at when it kind of comes to making the decision around payout and with this are basically in what's the CET1 ratio will you be looking at a year? Should we think about the 15.7%, excluding the IFRS transition relief, and excluding software as the kind of right or capital number? Going to sort of pro forma for the regulatory changes. And the reason I asked that is also because I'm wondering whether the previous historical approach of paying all of your capital out above the right CET1 number is still valid in the current context, so interesting if you have any thoughts you have in that. And then maybe a follow-up on your comment around non NII. You highlighted there were a few one-offs this quarter, and you reiterated that you expect a gradual recovery in the second half. Can I check, does you expect that sort of base level should be still the GBP1.1 million type of run rate that you've talked about previously, referencing the gradual recovery? Or should we think is now more like GBP1.2 billion in terms of what we should be building on?

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Yes. Thank you, Raul. To address each of your questions in turn. First point is just to reiterate, the fact the Board remains frankly, committed to capital return, just as it has always been. And there's really no change there. And hopefully, today's statement of the interim dividend of the back of the change in PRA guidance is confirmation of that. It does, as you say, come off the back of a very strong capital position and 16.7%, as I mentioned in my comments earlier on, is unequivocally well ahead of both our industry capital requirements and indeed our own internal capital policy. Now looking forward as to the considerations that we will take into account for any distribution of excess capital at the end of the year, it will be the usual factors.

Our capital position, the macro outlook, regulatory factors, investments in the business and so forth, the usual parameters. You ask what is the relevant capital ratio to look at in making that consideration. And I think as you say, you could take the 16.7% as it stands today, if you make as it stands today adjustments, I think you would be -- you'll be right to look at the software adjustment. We anticipate that coming off as of the first of January 2022, which is circa 50 basis points or thereabouts. You could also look at transitionals, the source of transitionals as they roll off over coming periods is the combined effect of the development or the evolution of the macroeconomic forecast that we have. And the expectations for asset quality in that environment, number one. And also to a degree model adjustments that we'll see on the first of January next year, number two. There are some mechanics within that that give rise to effectively costing some elements of the transitionals.

You could take, if you like, a relatively prudent approach and say right, I'll just take that transitional block out, which is 78 basis points today, as you know. I would just bear in mind that the experience so far has been a little bit better than our expectations we have to see clearly how that rolls out over the second half. But it is possible, in line with the comments made to Joe earlier on that some element of that transitional does not roll off in exactly the way that we expect. Credit quality turns out to be a bit better than we expect. And so some of those transitions effectively justify the capital base. But I think, Raul, we have to see how things develop. You can see our guidance that we've given today, you can see our macroeconomics that we've given today. And that's our best shot as we stand today.

When we look at the target at the end of the year, one point that is apparent is that the RWA density in the business is increasing. And inevitably, that causes us to think about what does that mean for our overall capital position within the business. Right now, we very much stick with and stand by our 13.5% total, which, as you know, 12.5% core, if you like, plus a 1% management buffer. That is predicated upon essentially stress analysis of the capital base of the business. As that stress analysis stays the same, but regulatory RWA density increases, we obviously have to think about that. But that's not for today, that's for the end of the year. The second question you mentioned on OI. As you say, the OI developments over the course of the quarter have been positive.

We've seen GBP1.28 billion in quarter two OI, which as you say, is positive on quarter 1. Composed to two main elements, really. What is just under GBP100 million of essential benefits from our equity-related businesses and also a minor element of insurance assumptions. So you can potentially at least strip that out. But what we have also seen, which is encouraging, is some resumption of activity in retail, particularly interchange. And in insurance, things like workplace, things like protection and so forth. And so the activity accounts for the remainder of the uplift in OI in quarter 2. We do think that, that is predicated upon less than 1/4 of full reopening.

And so if and as we see full or reopen going forward, and essentially, consumers being a bit less cautious than they have been, there is potentially more to go for and that activity led recovery. And that's consistent with the GBP350 million to GBP400 million costs that I've mentioned in the past, over the course of three quarters of lockdown that we saw in 2020. So I think organically, you'll get that rebuild. And to your point, I won't be too precise about a number, but it does look like the run rate is moving up from 1.1 to something that is more like 1.2. Now as I said, maybe there's a little bit more to go forward. We have to see how the economy reopens. And then I think on top of that, as I said before, you get the gradual benefits of the organic investments that we have been making on this line. Final point, Raul, is that as ever, OI is going to be activity dependent. The signs so far rather in Q2 have been constructive. We certainly look forward to more of that as the economy reopens, but again, that activity dependency is really the key.

Raul Sinha -- JPMorgan -- Analyst

Got it. I apologize, but I think you cut out slightly in the answer to the capital question. So just to clarify and make sure I understand correctly, not all of the transitionals should be adjusted out, some of them might solidify. And then your 13.5% ratio, given the increase in out of the identity, you will take a close look at will be a ratio for the group as well as per year?

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Yes. Raul, just to retrace the, apologies to cut out. On the transitional -- the point that I was making is that you can look at our capital position, which is very strong today at 16.7%. And you can take a view if you want to strip out of software, which makes sense to me because the PRA is going to strip it out in the first of January next year anyway. And you could look at the transitionals, which, as you know, 78 basis points currently composed partly of dynamic and partly of, and you could choose to take those out. The -- and again, that would be fair enough.

It's the move of transitionals is driven by a combination of macroeconomic evolution of the asset book, plus also first of January 2023, RWA changes, which impact on transitionals. My only word of slight portion there is that macroeconomics have, so far this year, turned out a little bit better than we had expected. And therefore, if that continues to happen, some elements of the transitionals that previously have if you like, covered Stage three movements in our asset base, stage 1, two through three movements in our asset base. We'll not cover that, because that evolution doesn't take place. Instead, these transitionals stay on the balance sheet in the capital ratio and effectively derisk the capital ratio and remove the sort of drag going forward.

Whether that happens or not is really dependent upon your view of how the macroeconomics unfold in the second half of this year. We've given you our view of the macroeconomics, but everybody has their own view on that topic. So that's Raul, on that point. On the capital levels, I was simply making the point that we are very much sticking with our 13.5%, which consists of 12.5% plus, as you know, a buffer of 1%. At the same time, one of the factors in that capital level is stress performance of the business, that stress performance hasn't changed despite the fact that we are seeing an increased RWA density off the back of the changes in January of next year. We stick with our capital targets for the time being, but we acknowledge that, that point is going on in the background, which is really an interesting development.

Operator

We will now take our next question from Benjamin Toms from RBC.

Benjamin Toms -- RBC -- Analyst

Good morning. Thank you for taking my question. Just firstly on Embark, the purchase of the gap in the bank's mass market past proposition. Are there any other gaps in your market position do you think natively enhancing? And how are about Goldman Sachs and getting more than moving into the space with the markets and nutmeg? And then secondly, there's been some recent press on noise entering the real estate market. Can you give us an idea on how big a part of the Lloyds Group this business could eventually become?

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Yes. Thank you, Benjamin. There's three questions in there. So perhaps to take them in order. The first point is that we're obviously very excited about the acquisition of Embark today. It starts as we see it completely the waterfront of our wealth offering. So if you look at our wealth offering right now, it's really composed of three main components. One is the acquisition of Embark today, which is aimed at market and self-directed consumers as well as enhancing also our intermediary proposition. I'll come back to that in a second. two is for those that prefer advice at the personal wealth offering is in place. And then three is in relation to high net worth customers, we have the investment in that we have. So what we have is a very complementary wealth offering, which we see as now being a complete waterfront.

We have been working with Embark a long time to secure this acquisition. We're tremendously pleased that we have managed to announce it today. We very much look forward to working with the Embark team going forward. What it is going to do is, as I said, it's a significant addition to our wealth and a trading proposition. And what I mean by that is it gives us a direct-to-consumer capability on what is a modern platform for a spectrum of consumer savings products. It also gives us an ability to integrate modernize HSDL alongside our execution platform. Thirdly, it gives us the platform on, again, modern technology, FM technologies to transform our retirement account drawdown and in our accumulation proposition.

And then finally, it gives us an interesting B2B white label business in savings platform area. So it's a -- it's a tremendous proposition, which sits in a very complementary fashion to our existing wealth offering. The reason why we're so excited about it is because this is a huge opportunity. We think that over GBP10 billion of assets under management every year leaves our Lloyd's customer base to go and be managed by other providers. There is no reason why that should be the case. We should be able to offer a compelling proposition to our savings going forward to our entire customer base. And indeed, that's what Embark is going to allow us to do in a complementary fashion, to show personal wealth and of course, interest.

So for now, Benjamin, our wealth offering is very complete. We see it as compelling across the waterfront, and we're really excited about what we can do with Embark going forward. You asked about JPM and Goldman Sachs. I think we have to let competitors do whatever it is the competitors are going to do. The only point that I would make is that the fact that they are interested in operating in the U.K. market, I think, just underlines but it is an attractive market, and it's a market that we really believe in. We were here yesterday, we're here today. We're going to be here tomorrow. We're an long-standing feature of this market. And whatever the competition from outside of the U.K. brings in, we'll address that as it comes. Third of your questions, Benjamin, around the Citra initiative that we have.

A couple of points to make there. One is the work that we're doing with respect, Citra is to address what we consider to be a relatively poorly served market with a lot of private landlords that are many withdrawing and a market where we believe we can really help customers. The area of housing and any risks associated with that is an area of significant expertise for us, clearly. And so we see this as an ability to leverage off of many of our core competencies. It's also somewhat adjacent to our other business areas. That is the generation of long-term assets is obviously interesting to us from our insurance perspective as well. So there's a degree of complementarity there.

And what it gives us further more is the opportunity for a really holistic customer offering where we can offer a customer a high-quality rental proposition, potentially at least, there is also a customer who may be interested depending from the circumstances in insurance, in personal credit, mortgages. And so we see this as very adjacent to our core areas of expertise. But I would say, Benjamin, that underlying all of this is a very disciplined approach. We are keeping this on a limited basis while we explore the area, while we allow ourselves to learn from it. And as I say, we will take a very a prudent and appropriate approach to gradually storing this area further in line with the objectives that I just laid out.

Operator

We will now take our next question from Rob Noble from Deutsche Bank.

Rob Noble -- Deutsche Bank -- Analyst

Good morning. I have couple of questions. First one is on costs. I think within your original GBP7.5 billion guidance you'd already assumed an increase in performance costs. So is the new GBP7.6 billion guidance, does that assume performance costs exceed 2019 levels? Or what these costs? And then secondly, there's been a big uplift in commercial banking gross margin as well. You gave a bit of a breakdown between -- the margin between SME and midcorporate. And how you think about the margin of that business in particular going forward and for the group.

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Yes. Okay. Thank you. First of all, to your question on costs. Just to restate the points at the outset, really, the costs remain the core area of focus for us and indeed, a core source of competitive advantage. Our discipline very much remains. And you can see that evidence in the cost income ratio that we have, which continues to be market leading. Now we did increase costs 2.5% relative to last year because of the increase in variable compensation. And as I mentioned in my comments, excluding if everything else is on track, whether that's property, whether that's it, whether it's operations or with marketing. Now as you rightly point out, Bob, that much of the increase in variable pay is actually already in the GBP7.5 billion guidance that we gave at the beginning of the year. You're absolutely right in that respect.

What we've done today is to acknowledge the fact that income developments are proceeding faster and better than we expected. Likewise impairment developments. And that then causes us to look at that variable pay and to accelerate some of the rebuild that we have previously built into future years. So essentially, what you're seeing today is just to bring forward, because of the better income, because of the better impairment performance of that increase in variable pay, that otherwise would have taken to place during the course of '22, '23, obviously, depending upon the development of the P&L during those periods. So hopefully, that helps you in terms of the understanding in that area. But again, just to underline that this area remains key and a core component of our competitive advantage. The focus is not lost.

We do want to recognize colleagues, given the fact that we paid no bonus last year. We want to recognize the colleagues of things -- to colleagues that things are proceeding in a better way than we had expected, and therefore, it is appropriate to enable our colleagues to share in that performance. CB margins, the commercial banking margin that you mentioned, it's really -- as you can see, a part of the overall group margin that we have given. And the overall group margin basically showed 250 in the first half. We're forecasting forecasting. We're giving guidance for 250 across the year. And so you can see that our expectations for the second half of the year are pretty much in line. So kind of a steady picture for margins during the course of the second half. As for particularities of the commercial bank margin, there's a number of different moving pieces that are going on in there.

One is optimization, which is a positive pressure for the -- an upward pressure, if you like, for the commercial banking margin. And that is off the back of the way in which we approach customer relationships, the way in which we select assets that we invest in or invest in, the way which we manage the balance sheet in connection with our RWA activities, a number of different factors, but that contributes -- that optimization process contributes to a better commercial banking margin than would otherwise be the case if we did nothing. The other elements that are at play here are developments in terms of the the organic lending picture, which, as you can see, has been relatively over the course of the half. Frankly, that reflects a commercial market that is pretty flush with cash, and therefore, not necessarily needing to take out new lend facilities in quite the way they might normally do.

We'll see whether the recovery changes that over the course of the remainder of '21 and indeed going forward. And then thirdly, the composition of government lending in that picture, which at the moment is pretty much in line with what we have with what we have seen before, but we are now starting to enter the repayment period. So things like balance backlogs, for example. Overall, that is just one of three components, but it's notable. That's the asset side. Now flip over the liability to the liability side, you can see that our funding costs have come down over the course of the half. That is reflecting a very liquid balance sheet. That, in turn, helps the commercial bank margin. And that's a further factor, which would play into the equation, Rob.

Rob Noble -- Deutsche Bank -- Analyst

Can I just quickly follow-up on your cost point. So I haven't fully appreciated that you accelerated the performance from the 2022, '23 years. Presumably, if I look at consensus, of course, if impairments normalize higher, then the performance costs will come down in 2022 and provide some offset there. So how we should think about it?

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Well, essentially, the variable pay component, Rob, is it simply a reflection of the P&L development that we have seen. So the -- and that hopefully explains you all the questions. I mean I think if impairment has come down next year, that's clearly a better financial performance for the business. And we obviously look at variable pay in that context. I'm not sure whether that answers your question, but hopefully.

Jon Burgess -- Finance Director

And William, there's an element of those costs that are deferred across interest relating to this year's pay or as well. So you won't get that fluctuation that you're pointing toward.

Operator

We will now take our next question from Omar Keenan from Credit Suisse.

Omar Keenan -- Credit Suisse -- Analyst

Good morning. Thank you very much for taking my question. I've just got two. So firstly, on consumer credit. We can see, thanks to the slides that credit and debit card spending above pre-pandemic levels. I was hoping you could help us think a little bit more about credit card spend and how that's evolving as well as payment rates? And how these two factors are balancing to influence the development and interest-earning balances in the credit card book? And perhaps just what observation that you're making around the behavior of the U.K. consumer as we're moving through the opening reopening and what might say about whether they'll return to more normal patterns of behavior? And my second question is just on mortgages. I was wondering you could give us a little bit of color perhaps on where completion and application margins were over the second quarter? And perhaps where application margins are in July, if possible?

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Yes, Omar. And perhaps just to kick off on the consumer behavior and one or two points on spend data. As you rightly pointed out, total spend is strengthening without a doubt. And if you add up debt and credit card, it's ahead of 2019 as we stand today. But within that credit card spend, to give you some idea, it's down about 7% on June 2021 versus June 2019. So credit class spend is still a little way behind, albeit it is strengthening. Within that credit card spend, you've got a couple of different components, really. Retail is strong. Entertainment, not surprisingly, is coming back. But still, there's a significant drag in terms of travel, again, not surprisingly, versus what you might have seen in 2019 -- in the equivalent period in 2019.

And it's that is a big driver of credit card balances, in particular going forward. We're also, as you say, seeing numbers of transactors as we call them if you like, and revolvers. And that's what's leading to the higher repayment levels in terms of credit card balances. So there might be a transaction on credit card, but it's repaid more quickly. Now inevitably, as we go forward into the opening up period, we will see more purchases of consumer durables. We'll see more travel, and it's travel in particular, which is, by way of example, around 30% of our credit card spend, so it's a big contributor to credit card spend. And as we see that travel unlock, so we would expect to see credit card spend start to rebuild. Now we are expecting a degree of caution to remain within the consumer outlook and consumer behavior.

So it is interesting that we have seen what may well be an inflection point in cash balances in Q2, they've been pretty stable through the course of Q2. And we do believe, and we've mentioned in our -- in my script earlier on today, we do believe that we'll see a modest bounce back in terms of card balances going into second half of 2021. How fast that is will clearly depend upon levels of activity, in particular, things like travel spend, as I just mentioned, in one or two other related areas. We're being relatively cautious in terms of what we expect to see. We do expect to see a rebound. We do expect to see a rebuild. But perhaps still a little bit shy of year-end 2020 levels, but again, activity dependent. On your question on -- your second question on mortgage margins.

The -- as you know, the market was very attractive during the course of the first half. We were very pleased to play such an important role in meeting customer ambitions and demand in post pandemic period. And expecting their kind of housing preferences, I guess. And you would have seen in our first half, we did GBP12.6 billion of volume and the second quarter, we did GBP6.6 billion. So it's really a very strong market. And during that time, we had frankly, very attractive margins. During the course of the second quarter, it came down a little bit. We were at 175 completion margins in quarter two versus quarter one of 119. So you have seen some reduction.

But that 175 is still compared to a maturity out, the asset that is replacing, if you like, of 133. So you still got a very positive development in terms of that turnover. Now as to applications today, they continue to come down. We're still at the point where margins within the mortgage business or pricing, I should say, within the mortgage business is still well ahead of Q1 '20, the pre-pandemic period. But there's no doubt, Omar, that there is increased levels of competition on that front-end pricing. And we would expect that to continue during the course of Q3. So we'll -- as an approach, we will retain our discipline in terms of our participation in that market. The mortgage market remains very attractive, built upon attractive margins right now. We are seeing further competition, and we'll obtain our approach accordingly over the course of the second half.

Operator

We will now take our next question from Alvaro Serrano of Morgan Stanley.

Alvaro Serrano -- Morgan Stanley -- Analyst

Good morning. I've got a couple of follow-up questions on capital, please. William, you mentioned that you could sort of have a look at the 13.5% target. Obviously, the stress is absolute in RWAs going up, implying it could be somewhat lower. But if we look at the stress test from the PRA, sure -- they saw a larger drawdown of capital. Can you sort of maybe speak to that? And are you -- is that a risk that we learn in the full year when we get back buyback detail that there's another nudge in terms of capital you required to hold? Is that a risk to that potential lowering of the target?

And second, when we think about the Board discussions that might happen in February -- that will happen in February around the potential for distribution. Obviously, you've mentioned that they'll think about potential headwinds. My question was on Basel 4-- 3.1, sorry. Can you maybe talk to the sequencing? You've mentioned that the peak impact is going to be 2028, but would be outperformed, but obviously, you're looking for reductions in the RB models. Can you speak to the sequencing there? Is -- are you going to see a benefit initially? And would the Board take that into account? Just talk us through that if you can.

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Sorry, Alvaro, your second question, I just want to make sure I follow. Would you mind just briefly repeating that?

Alvaro Serrano -- Morgan Stanley -- Analyst

Yes. So on the Basel 3.1, you mentioned that it's neutral now. The peak impact would be 2028, you mentioned, I think, in your script. But initially, you'll have presumably some RB sort of changes that you're also flagging. So I just want to understand what's the with those impacts? And to the extent the Board might take into account when they decide about distribution in February?

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Yes. No, that's fine. Thank you, Alvaro. So I think your first question, in terms of stress tests, as you say, the stress test will be disclosed on the PRA at the end of the year, and that will be on an bank by bank basis. We are obviously participating in the collective in the aggregate stress test right now. I might try and disclose anything more about that. But I think overall, we would expect to be strong enough to withstand stress pressures and to continue lending into the economy, which is the key policy objective that I think people would like to see us achieve. We have to see how that evolves. But I think in the context of our overall capital targets, our capital targets will take into account a whole range of things. And as we look at them both today and at the end of the year, there's a number of factors that play into that.

I mentioned risk-weighted asset density is one example, but it's obviously also things like the macroeconomic outlook, the performance of the business against stress, taking into account any regulatory variations. The uncertainties that there might be in terms of the pandemic environment, for example, there's a number of factors that will play into that. Our capital target today is 13.5% based upon the 12.5% plus 1% buffer. That remains the case. There are a number of factors that, as always, we will look at in the context of capital targets going forward. The Basel 3.1 question that you mentioned, we've talked in quite a bit of detail around the effects of the regulatory RWA inflation on the first of January 2022. And hopefully,

I've given enough information on that or if not, things do ask. But what's also interesting is as we move forward in 2023, there is a further capital development described in Basel 3.1, as you say. And as as you pointed out in my script, I mentioned that there's no material impact from that. And the reason for that for us at least, is because at the moment, we're operating off of foundation IRB standards. And so when we get to Basel 3.1, the changes in the capital regime convey some benefits for those banks that are on foundation IRB. It's things like a reduced scale in the risk-weighted asset calculation. It seems like a reduced credit conversion factor for undrawn facilities. It seems like reduced loss given defaults. Now for sure, there are some headwinds. The removal of the corporate for CBA is one example. Revised standardized operating risk is another example. There is a debate right now about whether or not the SME scale should be removed is a third example. So there are some headwinds in the context of the 2023, Basel 3.1 introductions. But for us, because we're on foundation IRB, the benefits at least accommodate those headwinds. And so as a result, we're calling it neutral at the moment, recognizing that there's a bit of uncertainty in this area. We do expect more clarity from PRA in Q4, I think it is of this year. But for now, we're calling it a neutral.

Alvaro Serrano -- Morgan Stanley -- Analyst

So just a quick follow-up to summarize my sort of -- if I get it wrong, at the moment, if you take out the software, you're at 16.2% the headwind, certainly the RWAs in 2022 are lower consensus has, and there's not much more inflation to go beyond that. So I mean with the current sort of asset quality outlook, that's pretty much all distributable down to 13.5% or even below. Distributable or investable, if you do more acquisitions. Is that -- am I missing something very obvious? Or we can happily assume that's all available?

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

No, I don't think you're missing anything obvious in terms of the inputs of our. We have the capital position as at today, 16.7 I think as discussed earlier on, you can take a view on software. You can take of you on transitionals. I do think that you need to look at the first of January 2022 RWA inflation and recognize that comes early in the year. And then we have the organic build of capital, assuming normal operating conditions over the course of next year, which then offsets that clearly. And we then get the dynamic that I described '23 of the back of Basel 3.1. So I think those are all the inputs. And then in terms of the decisions around what to do with excess capital, if we see it like that, at the end of the year, it does revolve around the regular standard processes that we go through toward the end of the year, and that will include the macro -- the outlook, the investments of the business, usual stuff really. Nothing changes.

Operator

We will now take our next question from Andrew Coombs of Citi.

Andrew Coombs -- Citi -- Analyst

Good morning. I think my question has been answered. Probably a clarification. Actually, I think in answer to Omar's question on the mortgage margin, we go from GBP191 million in diving Q2 that our current acquisition run rates are lower, they still above where they were a year ago, I think you provided a number, could you please just provide us with the numbers why the current acquisitions are? Question one. Question two is to from the dividend. If I look at the accrual you put through in capital annualized it, it looks like you're accruing up dividend for the full year. [Indecipherable] And then just what you mean [Indecipherable].

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Andrew, I got the first two of your questions, but you broke off a little bit on the third question. Would you mind repeating it?

Andrew Coombs -- Citi -- Analyst

Clarifying what your debt initiative progressive means to dividend.

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Progressive, I'm sorry. Right. Okay. Fine. Yes. Thank you, Andrew. In response to your first question, In response to your first question, as I said, Q1 completion margin, 190, Q2, more like 175. As said, those are still both actually very favorable and actually quite similar simply because of the backlog distribution benefits to the asset that rolls off that they replace. We haven't given a number for current applications. And the reason for that is, because it moves around quite a lot. And so therefore, we are seeing increased competition in the market. That is a trend that we expect to play out during the course of Q3. Hopefully, the direction, therefore, is clear, but we are not giving kind of precise numbers simply, because they move frequently.

On the second question, the dividend accrual, we do -- we are asked to accrue effectively for all foreseeable dividends as indeed for any foreseeable capital outflow. And so you'll see the 37 basis points that you accrued for dividends there, and you can obviously work out from that, what do you think it might imply as to the statement around where we think the full year dividend might be going. But that is clearly contingent upon the Board's discussion at that time in the second half of this year. And I'll leave you to figure out the numbers and where you think the Board might end up on that topic. The progressive point, it's a good question. I mean what we've done today, as I say, is to recognize the importance of capital return to shareholders.

That's unequivocal. We've described the dividend as progressive and sustainable, and that's a commitment going forward. And what we've done is essentially set the dividend at a level that allows us to put forward, a, an attractive income, but also of progressing a sustainable growth going forward, allowing for whatever macro uncertainties there might be out there. And so we're focused not just on the dividend today, but we're also focused on creating room for the dividend to grow in a positive way going forward. And that's part of our considerations, too. So I won't put a number on it, Andrew. I don't want to be too tightly defined, but we are conscious of wanting to grow this dividend going forward.

Andrew Coombs -- Citi -- Analyst

Thank you. I mean perhaps just quickly coming back to the point on the current application margins. I guess if I look at your current pricing across your product range, it's two or three or 5-year range of LTV rates come down by 25 basis points over the last month or couple of months. If you add that in with where you've seen the forward spreads go, it looks like you'd be looking at quite a big drop from 175 in Q2 down to Q3. Can you just confirm you are comfortable that you are still writing business to come above the back book 133 that you mentioned?

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Yes. I mean I can tell you, Andrew, that we are comfortable with a solid pipeline of mortgage lending that we have for Q3 right now. That is based on pricing, which, by definition, we see is attractive. And so -- again, I won't put numbers on -- in terms of new applications. But by implication, hopefully, you get there. So reach the conclusion that you just reached in your question.

Operator

We will now take our next question from Aman Rakkar from Barclays.

Aman Rakkar -- Barclays -- Analyst

Good morning William. I have a couple of questions on growth and so on consumer credit. So I guess the first one was around your kind of medium-term appetite for growth in the business. I kind of note -- I know you guys haven't filed the report right now, but I suspect you're growing your bank above the net systemic buffer capital charge. So I guess, if that was to happen, which presumably given the mortgages, the consumer credit opportunities out there, if that was to tip you into a higher systemic capital charge in the ring-fenced bank, could that have any implications for the group CET1 ratio? I mean, obviously, I note that alongside the commentary about the lower stress drawdown. So I guess that would be the first part of the question.

And I guess, secondly, related to that is what could this potentially signal about your growth ambitions for the business? Presumably, if you do tip into that higher systemic charge, are you kind of incentivized to continue growing now? And I mean, should we expect your balance sheet to continue growing actually through 2022 and beyond? And I guess a kind of third related question to that is, particularly the corporate loan book. It does look like you're looking to do quite a lot of optimization in that business next year to offset the regulatory RWA inflation. I mean, what does that mean net-net for kind of net commercial loan growth? I mean, can you grow that book in '22?

Or actually, is there too much kind of optimization and government-guaranteed refinancing taking place and believe that, that's going to weigh on that. And I guess, just the final -- or the second question was around car finance. I was actually kind of surprised to see that take a step backwards in Q2. Just kind of interested in kind of what you're seeing there and to what extent does that relate to a kind of supply bottleneck? It looks kind of interesting, particularly alongside the appreciation, second-hand car prices that we're seeing. It's obviously good for operating lease depreciation, but when can we expect that car finance book to start growing?

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Yes. Yes. Thanks, Aman. On the first of your three questions, growth RFB thresholds. It's a good question. I guess the start point is that while we are clearly building the business, we are still below the GBP610 billion cap that is relevant to the OSII charge in respect of the ring-fenced bank. So we are still operating within the levels of assets that is consistent with our current OSII charge and a RFB and ultimately, therefore, at a group level. If we were to exceed that level, then it would add on a further 50 basis points of capital to the RFB, which in turn then plays itself through into -- in a slightly lesser form, obviously, in a proportionate form to the group capital charge. So that's the consequence of moving beyond. Now where we are today is partly a function of growth activity on the asset side of the balance sheet.

And hopefully, that continues in the context of a recovery, but it is also a function of a very liquid environment and partly a function of the growth in deposits that we've seen, GBP63 million since the beginning of 2020. And so that allows us to potentially manage the balance sheet in a sensible way going forward to stay within the GBP610 billion cap, if that's what we choose to do. If indeed we were to ever take that decision to go beyond GBP610 billion, it would be in the context of growth within the business, and it will be in the context of income opportunities. And so it would be, from our perspective, at least, a value-added opportunity to go beyond that cap taking into account that, as I say, it would incur incremental capital for us on the OSII charge.

The other point that I'd make, though, again, a, we have a certain amount of slack before we get beyond that GBP610 billion cap. And that is induced because the balance sheet right now is very liquid. And number two, we are -- even if we were to get an incremental charge in the event that we went above that cap, we're clearly at a capital level that is in excess of our target capital requirements, however, it is manage -- however, as you measure them. And so I suppose to answer the question, Aman, it is an area that we are clearly keeping an eye on. We do have appetite for growth in the business. We do believe that, that growth right now is consistent with our RFB cap. But if we were to go beyond it, it would be in the context of effectively the income realization opportunities and indeed, economic value-added opportunities going forward. Second question, corporate loan book.

The corporate loan book, balance sheet development, it's a function of a number of different factors, but you referred specifically to optimization and the role that has. It's worth just returning to that and spending a minute on it. The optimization process is -- it's partly about low-returning assets in areas of the book that don't make economic sense. And so we obviously address that in the context of our client dialogues and see that as an opportunity to enhance the value of the balance sheet and indeed the business. It's also about capital-efficient securitization choices. It's also about things like collateral management and to a degree, also about rerating of elements of the book. And so all of these things and indeed, not just in the commercial business, but across the business as a whole, are seen as a continual process of balance sheet management. It's not just about doing it in 2021, and then that's kind of done. It's a process of continual management of the balance sheet.

And frankly, over time, we will look to get better and better at that. We believe that we can add value in the approach that we have in terms of serving customer needs, clearly, but also in terms of how we manage those customer needs in terms of the balance sheet. But it's obviously that applies and most significantly that applies to commercial bank, but it's a proposition across the balance sheet, and it's a continual process. I think on the third question, that's car finance. Aman, the -- what's been going on in the car finance market is a combination of a couple of different things. One is, as we've said before, the change in approach to corporate fleet has led to net volumes falling, not just actually in this half, but it's been falling for a number of periods now.

And that's just a difference in effectively company car policy that we see playing out there. But in this quarter, what's also playing out, and I think what's behind your question really is that there has been a bit of a slowdown in dealerships restocking that sort of thing off the back of lower levels of new car supplies. And so as a result, the motor asset has been impacted by that. I think that resumes to -- back to normal levels, potentially during the course of the second half, for sure, during the course of 2022, that some of these kind of pipeline plugs, that are not just in the car business, but endemic to the economy fat, as those play their way out. So what we'll get therefore is kind of three factors that play out in the second half and going to '22. One is the continued company car point I made around next a second ago. One is the unclogging of these pipelines around dealership stocking return to a more normal levels. And one is potentially more enthusiastic recovery in the economy, which in turn builds motor demand. So I think all three of those things come into play. But I think what you see in the second quarter is particularly that leadership stocking point.

Aman Rakkar -- Barclays -- Analyst

Thanks, Bill. I mean, you might not want to give too much guidance in '22 and onwards. But it does sound like there's actually quite a lot of growth if I think about mortgages, consumer credit and maybe a bit less in corporate, but it does look like you should be able to kind of carry on growing that balance sheet through next year.

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Well, I think we feel good about business today. We think it's been a solid performance in Q1 and then again in Q2. The outlook, as you can see from our economics has been improved, we believe that we are on the prudent side of general market consensus around that topic. But we feel that clearly, activity in macro dependent. We feel generally good about how the business progresses in the second half of 2021. And then we'll see how the macro economy unfolds during the course of '22. But you've seen our guidance improvement for the second half of this year, which hopefully gives you some insight.

Operator

We will now take our next question from Jason Napier from UBS.

Jason Napier -- UBS -- Analyst

Good morning. Thank you for my question. Two, please. So first, coming back to the issue of costs. And I wondered whether we can approach it from a different perspective. It seems to me that the new guidance effectively requires you to keep the opex at the same level as 2Q for the next couple and then pay the bank in the fourth quarter. So there's certainly a lot of runaway cost inflation story. I wonder whether you would talk about the investment spend, please, last year and this year?

And sort of how the Board feels about investments in the platform away from things like Embark, whether you are spending enough and how that looks? And then secondly, just in reaction to some of the questions we're hearing from the market this morning. I wonder whether you might provide any color you could around the sort of scope of the provisions. The color around the opex versus findings split is helpful. But I wonder whether you might give a sense as to, I don't know how many of the cases have been adjudicated on or approached, just how it might impact capital returns in aggregate, either from a timing or a scale perspective?

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Yes. Thanks, Jason. two questions there. One on investment spend, one on development. So. On investment spend, investment spend, as you know, Jason, cuts across all areas of our business, whether it's legal, regulatory, mandatory as we term it, whether it's discretionary and any income or cost opportunities. Investments spend cuts across all those. If you look at the investment spend of the business overall, over the course of last year, this year, and even actually the year before that, it's basically staying at the same relatively high levels. So we're still looking at levels of around GBP2.5 billion, GBP2.6 billion of investment spend over these periods.

So within that, we are also, as you know, aiming to have just shy of GBP one billion, about GBP900 million of strategic investment spend. And that's been roughly half during the course of H1, actually slightly less than half, just really from implementation related reasons. But that's on track for the full year. So of the total investment spend that I just indicated, the GBP900 million or thereabouts of strategic investment spend is on track for the remainder of this year, and you'll see that play out. Related to that, you asked how the Board looks at the investment of the business. It's obviously critical for us to invest properly in the business to ensure the business is as successful going forward as it has been historically.

And so that's very much embedded in the strategic review 2021 ambitions that we laid out at the beginning of this year. I'm sure that as we take a look at that over the course of the autumn of this year, that will continue to be at the heart of our strategy, and we will spend in the investment capacity, whatever is appropriate to spend in order to keep business as strong tomorrow as it is today. On HBOS Reading, you asked. If you look at the remediation charge for H1, remediation charge reform was GBP425 million. That's composed of three components. One is the general insurance levered by the FDA that we disclosed about a week or so ago. One is HBOS Reading of about GBP150 million, and that is, as we disclosed, partly related to future operating cost today's operating costs as well as address.

And then the third component is GBP185 million of other essentially legacy related redress issues, again, of which a proportion is forward look operating non redress expenditure. So as you look forward at that going forward, Jason, one way to look at it is the GI FCA fine clearly drops out. The HBOS Reading find the forward-looking operational costs, they clearly dropp out by definition, we won't have taken them twice. But on the other hand, the redress costs may come in to compensate for that drop out. We will see about that. As we say, there's some uncertainty about the timing and the extent, but that's a way to think about it. And then the third component, as I said, part of that is look forward, and so an element of that drops away.

And then part of that stays as kind of an ongoing legacy item that we have to deal with. And so hopefully, that gives you some picture as to how we see that unfolding over the course of future period. What I would add to that is that none of the items that we are currently dealing with on the 3-point that I just made, the FCA, general insurance fine, HBOS Reading clearly and the bulk of -- the vast bulk of the legacy, none of those are new items. They are essentially old items that, obviously, we are working exceptionally hard to address in the right and proper way. But they are items, therefore, that we look to get beyond once we have done so and move beyond. Put them behind us and then focus on doing the right thing going forward.

Jason Napier -- UBS -- Analyst

And so just a follow-up, materiality versus capital distribution plans. I don't know whether there's any way that sort of still -- I mean, is this a material list to overall distributor that horizon.

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

I think the best way to look at it, Jason, is to take what I told you about future peers and how that charge might develop, which hope to give you a sense of proportion to recognize that the capital position is in a very strong capital position. And take into account some of the other comments that I've made about both the dividend, and excess capital considerations at the end of the year. But I mean this remediation charge just played its way through the P&L. I think as we see the capital position today, it's very, very strong despite that remediation charge going its way through the P&L.

Jason Napier -- UBS -- Analyst

Agreed. The beat on capital is bigger than the remediation charge.

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

It is not -- as we think about capital distribution going forward, Jason, to answer your question more directly. This is obviously a P&L factor that we have to take into account, but it does not alter our views overall of our capital distribution strategy.

Operator

As you know this call is scheduled for 90 minutes, and we now have reached the end of allocated time. So this is the last question we have time for this morning. If you have any further questions, please contact the Lloyd's Investor Relations team. We will now take our last question from Guy Stebbings from Exane BNP Paribas.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Good morning. Thanks for Most questions I had answered. I just wanted to circle back on net interest margin. Firstly, on the hedge, I just wanted to check the guidance of no headwind next year. That still implies a slight headwind versus the H2 2021 run rate. So I think the guidance for this year implies the second half contribution would be up slightly on the first half, whereas the comment for 2022, I think, is in reference to full year 2021. And then more broadly, as you kind of think about headwinds versus tailwinds into 2022 versus the 2021 exit rate, I guess, headwind from the SVR attrition, still maybe a little bit of a headwind on the hedge. Unclear on new mortgage paves the back book, but then on sort of tailwinds, we've got funding benefit, perhaps unsecured starts to grow ahead of security from a mix point of view. I guess, in the round, it doesn't feel like you should be expecting a big move in NIM next year, perhaps slightly more risk the downside than upside if new mortgaging spreads drifted lower. Does that sound like a reasonable way to think about it?

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Thanks, Guy. You're leading me into the territory of 2022 guidance. I'll be a bit careful about what I say in that. But in essence, on the hedge, it's pretty much a wash really. We've given the comment today that I gave in the script, but I think based upon current expectations for the yield curve, in line with the market, it's not an all too important factor in terms of the overall distinction between 2020 versus 2021 as a base when you look forward for 2022. I think as you look at the factors for 2022 on the margin, instead of giving you kind of direct input on that, I'll give you a sense as to what we see playing out in '21, and you'll then be able to kind of figure out how that plays itself out into '22.

As you know, we improved the guidance on the margin today to around GBP250 million that's up from what we said at quarter 1. And it's driven by a couple of tailwinds and a couple of headwinds. The tailwinds, first of all, a bit of benefit from the yield curve that we have seen playing itself out through the structural hedge, number one. Number two, some essentially capital cost savings, lower funding costs, lower capital cost kind of coming together in a sense. number two. Number three, some of the commercial bank margin developments, as we talked about earlier on, and those are all helpful tie up tailwinds in the context of the margin. Our headwinds are essentially a larger mortgage book, which is tremendously attractive from a net interest income point of view and also an economic value-added point of view.

But it is, on average, at a lower margin, and therefore, it's slightly dilutive from a margin point of view. And it plays itself out, obviously, later on, if you go into the year. There is also a little bit of margin dilution, a little bit, not much of unsecured dilution. And that's simply because our credit standards in the current economic uncertainty are very high, and therefore, you get a more dilutive effect from that unsecured book margin than you would necessarily normally get in a normal macro environment. That picture, I think, because of the mortgage point that I made earlier on maybe shows a bit of a stronger margin development in Q3 versus Q4, simply because of the weighting of that mortgage point is a little bit back ended. But Guy, to come back to your question, all of this is activity dependent.

And you've seen our economics over the course of this year, the forecast that we have for '21, the forecast that we have for '22. If you see that economics is either different today or alternatively changing going forward, then you can see our asset growth, and in particular, our asset growth in different areas is going to respond to that. And the most obvious point is the one as Jon made about earlier on, which is that if we see stronger macroeconomic growth than we expect, then you would start to see, then you would expect to see consumers use unsecured balances more than we are currently forecasting, for example. And that all plays itself into margin development over the course of the second half of '21 and the second half of '22. So I think take those two together, take our macroeconomic forecast, take our margin guidance and look at them as one and think about how they might relate to each other.

Operator

This concludes the question-and-answer session. I would like to turn the conference back to Mr. Chalmers for any additional or closing remarks.

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Just to say thank you to everybody for taking the time to dial in today. We appreciate the questions. We look forward to continuing the dialogue. So thank you very much, indeed.

Operator

[Operator Closing Remarks]

Duration: 93 minutes

Call participants:

William Chalmers -- Executive Director, Interim Group Chief Executive and Chief Financial Officer

Jon Burgess -- Finance Director

Joseph Dickerson -- Jefferies -- Analyst

Raul Sinha -- JPMorgan -- Analyst

Benjamin Toms -- RBC -- Analyst

Rob Noble -- Deutsche Bank -- Analyst

Omar Keenan -- Credit Suisse -- Analyst

Alvaro Serrano -- Morgan Stanley -- Analyst

Andrew Coombs -- Citi -- Analyst

Aman Rakkar -- Barclays -- Analyst

Jason Napier -- UBS -- Analyst

Guy Stebbings -- Exane BNP Paribas -- Analyst

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