Lloyds announces bumper profits alongside a brutal cull - how will customers fare in the aftermath?

Could this financial behemoth of a bank become "too big to serve" in a future dominated by internet and phone banking

James Moore
Thursday 28 July 2016 14:37
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Lloyds is cutting branches and jobs
Lloyds is cutting branches and jobs

It is a brutal cull. There is no other way to describe Lloyds Banking Group’s plans to axe a further 3,000 roles, and close an extra 200 branches.

The news was recorded as a “highlight” of the bank’s interim results statement, which tells you all you need to know about the way they think in the City.

The latest cuts come in addition to 9,000 redundancies that the black horse is already eating its way through, as part of a three-year programme that was announced in October 2014.

A staggering 45,000 jobs have been lost since the bank rescued stricken rival lender HBOS in 2008, a move that led to it going cap in hand to the tax payer for a multi-billion pound bail out. At this rate Britain’s biggest retail bank will, by the middle of the century, consist of the board, an IT department, and some cleaners and PAs provided by Capita, or one of the other outsourcing organisations.

Regular readers might expect me to start blaming Brexit. It would be easy enough to do so, but these cuts would have happened regardless, as the bank confirmed to me.

Brexit is causing Lloyds a headache, as it is for virtually every business in Britain. But chief executive António Horta-Osório gushed about the bank’s “simple low-risk model” helping his team to manage what follows. Give the man a bonus.

He’d like the Bank of England to get on with cutting interest rates, if that’s what is required to get the economy through its current turmoil, but at least there’ll be no silly RBS-style plans to charge business customers to make deposits as a consequence.

The cuts are a different issue entirely. Partly they are down to us. We are using bank branches much less than we were, and it is a trend that is accelerating, if Lloyds is to be believed. So there will be fewer of them.

But it is also a consequence of Lloyds’ strategy. As much as customers are moving away from bank branches, they are also being pushed. Remote banking, via the phone and the internet, allows the black horse to make more money with a lot less people, so it is only too happy to encourage you to go down that route. The quicker it cuts branches, the quicker that will happen.

Lloyds insists that branches remain a part of its strategy. People like to use them for bigger transactions. They prefer to speak to a human being when, for example, it comes to fixing up their mortgage. But there will be more cuts to come. Bank on that.

How will this new reality impact on the way customers are looked after long term? Lloyds likes to point to surveys saying it does jolly well. But every company I talk to says they can point to surveys demonstrating that they’re doing jolly well and banks were hardly winning awards before they started their cuts programmes.

Meanwhile, Lloyds is positively rolling in money. The bank managed to improve its “net interest margin”, the difference between what it pays to savers and charges borrowers, to 2.74 percent in the first six months of the year. Despite Brexit, it isn’t changing its expectations for the full year.

In the first half the bank made £4.2bn in “underlying profit” down by 2 per cent, excluding the contribution from the now offloaded TSB, having raked in revenues of £8.9bn, virtually unchanged, compared to the first half of last year. There’s been a bit of fretting about Brexit’s impact on its ability to pay dividends, but you know what the answer will be if that gets threatened: more cuts.

Lloyds has become a very profitable bank so no wonder the unions are cross. Its return on equity – a number banks use to measure their profitability – stands at 14 per cent. Investec banking analyst Ian Gordon thinks that number should be treated with a degree of scepticism. Even so, he still has Lloyds producing more than 10 per cent in 2017, a number none of the other big four are likely to hit before 2019. Both Barclays and HSBC have progressively lowered their targets but just keep on missing them.

The question now is whether Lloyds is too profitable, too powerful. Can challenger banks, with different models, and a more pressing need to keep their customers sweet, compete against such a financial behemoth?

This is something that regulators need to keep a very close eye upon. There is a danger that Lloyds becomes not so much too big to fail, or even too big to manage, but too big to serve.

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