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Lloyds chief banks on cuts to fund growth
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.
Too big to fail? Guerrilla central banking and the last resort
Deciding it was safe to come clean because banks are now on a more even keel and the worst of the credit crisis is behind us, the Bank of England has told the nation that at the height of the turmoil it secretly lent Royal Bank of Scotland and HBOS a colossal £62 billion, which is more than the entire British defence budget.
Both banks faced the imminent closure of high street cash machines and the curtailment of normal banking operations across the country.
The Bank said “this was a dire emergency” and Downing Street called the secret lending of taxpayers’ money in the Autumn of 2008 “a powerful reminder of how close the banking system came to near collapse.”
In Westminster, some MPs were flabbergasted, even though the loans have now been repaid.
“It is astonishing that this was kept secret for over a year,” said Vince Cable, finance spokesman for the Liberal Democrats. “The government has treated taxpayers like children while expecting them to foot the bill.”
John McFall, Treasury Committe chairman, said the sum caused “a little bit of an intake of breath thinking how many universities, how many colleges, how many jobs you could support with this.”
“It’s Enought to Make Anyone Feel Queasy,” was Ian King’s headline in The Times. “Any More £62 bn Loans You Haven’t mentioned, Merv?” asked the Daily Mirror, addressing itself to Bank of England Governor Mervyn King.
I take issue with some of the comments being thrown out today such as “the taxpayer has footed the bill” How so? the money has been repaid and no doubt with something extra on top as i’m pretty sure it’s not free money. the comparrisons with schools , universities , defence are not paralleled as there is no return from sone of these expenditures whereas with a “loan” and loan being the key word here, there is a return of the original investment plus some profit for the tax payer. Imagine what could be done if the government sold their stake in the major banks at a significant profit in the future. There’s exra money in the pot which wouldn’t have otherwise been there to sread downward on education and health and the armed forces. Where will the outcry be then.Individuals are not necessarily stupid but people en masse are. Look at the panic which eventually led to the collapse of Northern rock when it was announced they’d asked for a facility , not even taken , from the Bank of England. Mass hysteria and people queueing to withdraw the lifeblood of the bank for fear of them going under yet they themselves perpetuated the ultimate demise of the bank.Good call by the B of E I say. you can’t trust idiots to make the right decision.
Low-rate party comes to an end
First Direct has pulled the shutters down on new mortgage business. Albeit a temporary move, it is yet more unsettling news for scores of homeowners coming to the end of cheap deals. Such a move is unprecedented, but perhaps comes as little surprise, given that the lender has been market-leading for quite some time. With pricing more or less 0.5 percent below that of its nearest competitor, the influx of new business that has created a huge backlog is understandable.
The mortgage market is moving at an alarming pace: First Direct’s decision to suspend new borrowing and push business to its parent company, HSBC, is yet another example of lenders taking action to manage volumes. Others have used other means of stemming inflows — increasing rates, withdrawing products and restricting their best rates to lower loan-to-value customers, as the fallout from the credit crunch continues.
Borrowers, particularly those nearing the end of offer periods, are unnerved. Three-quarters of homeowners face significant jumps in mortgage repayments when their fixed-rate deals expire, personal finance Web site Fool.co.uk says, with a typical increase in interest from 4.8 percent to 6.3 percent. Homeowners on discounted, tracker and capped-rate mortgages could face significant hikes too. On a typical 25-year repayment mortgage of 200,000 pounds fixed at 4.8 percent, monthly repayments are 1,146 pounds. But every one percent rise in rates increases these repayments by around 120 pounds. The low-rate party, it seems, is finally over, and borrowers — both new and old — could be forgiven for feeling the rug is being pulled from under their feet.
All, however, is not lost: there are still some attractive rates around, largely from building societies and smaller players. Cumberland Building Society has a 5.28 percent rate fixed until March 1 2010; Derbyshire Building Society charges 5.29 percent until July 31 2010; and Cheshire Building Society has a three-year fix at 5.49 percent. Indeed, building societies have proved the most competitive so far this year, according to online mortgage company mform.co.uk. It ranks best-buy products based on the true cost of a mortgage, including fees. Each time a lender appeared in the top 10 in the three months to March 31 they were awarded a point and, at the end of the period, the most points signify those lenders consistently offering good value.
Yorkshire Building Society was the most competitive mortgage lender during the first three months of 2008, with 24 points, followed by Furness Building Society in second place with 18 points, and the Chorley and West Bromwich building societies in joint third with 13. The big players — Halifax and Nationwide — scored just six and four points respectively, while Cheltenham and Gloucester achieved just two.
But with lenders pulling tranches of deals and changing their offerings on a near-daily basis, nothing remains the same for long. The message is clear: people looking for a new mortgage should shop around early to wade through the quagmire that is today’s mortgage market.
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The Wall
