Lloyds chief banks on cuts to fund growth

July 1, 2011

By Margaret Doyle The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Antonio Horta-Osorio is applying the medicine he successfully administered at Santander UK to Lloyds. The lender’s new chief executive used his first strategy update to unveil plans to slash costs by 1.5 billion pounds by 2014. This, combined with the absence of further bad loan shocks, gave Lloyds shares a boost. But it’s less clear how the bank will generate future growth.

The savings equate to 15,000 lost jobs, on top of the 28,000 the bank has already cut by integrating Lloyds TSB and HBOS. With an eye on the UK government, which owns 41 percent of the bank, Horta-Osorio stresses that he prefers attrition to redundancy and won’t move UK jobs offshore. Nevertheless, the savings will cut Lloyds’ cost-income ratio from 47 percent at the end of 2010 to between 42 and 44 percent.

The savings are necessary to maintain a respectable return on equity despite substantial headwinds. If the Independent Commission on Banking’s recommendations are implemented in full, Lloyds will have to maintain a core Tier 1 capital ratio of 10 percent while simultaneously offloading more branches than the 600 it is already being forced to sell by the European Commission. Meanwhile, low interest rates have forced Horta-Osorio to trim the bank’s forecast net interest margin.

The bigger question, however, is how Lloyds is going to grow in a stagnant UK economy. Horta-Osorio has two plans: first, he wants to expand the bank’s already dominant market share by encouraging its Halifax brand to compete aggressively with other lenders — including Lloyds.

The other ploy is cross-selling. While Lloyds counts 20 percent of affluent Britons as its customers, it has had limited success in managing their wealth. The bank hopes that well-trained advisers and better websites will triple the number of customers of its wealth business and increase the amount of money it earns from each customer by half by 2014.

But British banks have tried such initiatives for years without much success. And those products they have managed to sell have tended to come back to haunt them: in May, Lloyds was forced to set aside 3.2 billion pounds to cover compensation claims for mis-selling payment protection insurance. Investors may be impressed by Horta-Osorio’s cost-cutting prowess. Convincing them that the bank can grow will be a harder slog.

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