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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.
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.
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.
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The Wall
