Banking giant stays upbeat as PPI sparks drop in profits
SHARES in Lloyds Banking Group rose as investors looked beyond a near-30 per cent fall in profits at the Bank of Scotland owner, which delivered an upbeat assessment of the UK’S economic prospects.
Lloyds reported a pre-tax profit of £4.93 billion for the year ended December 31, down from £5.96bn, as hefty provisions for payment protection insurance (PPI) claims weighed heavily on the bottom line.
Its share price initially increased by more than three per cent, before ending the day up 1.4%, or 0.77p, at 56.55p.
Lloyds, Britain’s biggest mortgage lender, set aside a further £2.45bn during 2019 to cover PPI claims after experiencing a surge in enquiries ahead of the final claims deadline on August 29. It took the group’s total provision for PPI to nearly £22bn.
Analysts also pointed to higher impairment charges, which rose by 38% to £1.29bn. Lloyds put the higher charges down mainly to two material corporate cases in commercial banking, while also highlighting some weakening in used car prices in Black Horse, its motor finance division.
Taken alongside a fall in net income, which dipped 4% to £17.1bn, these factors contributed to the bank’s underlying profit dropping 7% to £7.5n in a “challenging external market”.
Despite the profits fall, chief executive Antonio-horta Osorio was upbeat in his assessment of the outlook. He said the UK economy, to which Lloyds’ performance is “inextricably linked”, has shown resilience amid “significant political and economic uncertainty, supported by record low employment, low interest rates and rising real wages”.
He added: “Although uncertainty remains given the ongoing negotiation of international trade agreements, there is now a clearer sense of direction and some signs of an improving outlook.”
The Lloyds results were announced as the bank revealed Mr Horta-osorio had seen his pay cut by 28% cut to £4.73m, which comes after the bank caused controversy over the £6.27m he received last time. It came in for heavy criticism when it emerged Mr Horta-osorio’s pay included a pension contribution of 46%, compared with a maximum of 13% for other employees.
In a recurring theme for the UK’S biggest banks, Lloyds’ net interest margin remained under pressure last year, dipping to 2.88% from 2.93% as the base rate remains at near historic low of 0.75%. It expects the margin to be in the range of 2.75% to 2.8% this year.
The period saw Lloyds acquire Tesco Bank’s £3.7bn residential mortgage portfolio for £3.8bn, which brought with it 23,000 customers. The deal helped the size of Lloyds’ open mortgage book rise by £3.5bn to £270.1bn by the end of the year. Total costs were reduced by 5% to £8.3bn, with the bank guiding on further reduction this year to less than £7.7bn.
Nicholas Hyett, at Hargreaves Lansdown, said: “We expected Lloyds to report a fairly tough end to 2019, with both retail and corporate customers cautious in the run-up to the election. However, the outlook for 2020 is more important, and there we have some good news.
“The bank reckons it can squeeze more out of its already market leading cost base, and forecasts for capital build bode well for both the dividend and potentially a renewal of the suspended share buyback programme.
“We also note that, despite a spike in bad loans in 2019, the bank doesn’t expect conditions to get worse next year.”
The Lloyds results brought down the calendar on the reporting season for the big UK banks.
Royal Bank of Scotland caused controversy when it announced plans to change its parent company name to Natwest Group.
The Royal Bank name will be retained for branches in Scotland, with chairman Sir Howard Davies stating the institution will not be “unscrewing any brass plaques” in Edinburgh when asked if there would be any ramifications for its Scottish head office.
HSBC said it will slash 35,000 jobs across its global operations as it reported a 33% fall in pre-tax profits to $13.35bn (£10.2bn).
Lloyds is recommending a final ordinary dividend of 2.25p per share.
That would take the total ordinary dividend to 3.37p – up 5%. Called to Account, page 24
THERE was a temptation initially to feel that Royal Bank of Scotland’s decision to change its parent-company name to Natwest Group was not that big a deal, on hearing the news last Friday morning. There were two main reasons for this. The first was that the move had looked inevitable, given that the mood music and marketing campaigns emanating from Royal Bank for a number of years had seemed to indicate a preference for the Natwest brand.
The second reason for not getting particularly excited on first hearing the name-change news was that, certainly from the outside, it appeared that the highest-level decision making had shifted surely from Edinburgh to London over the last decade in any case.
In short, it has seemed for a long time now that this ancient banking institution is far less Scottish than it was.
That is not to understate the importance of the high-level operational jobs at Royal Bank’s site at Gogarburn on the outskirts of Edinburgh, or the significance of the institution to the Scottish economy.
It is just that, in practical terms, Royal Bank has not over the past decade looked that much like the truly Scottish-based operation which it had been for centuries.
And the ascension to chief executive of Alison Rose, who studied at Durham University and joined the Natwest graduate scheme in 1992, does not look likely to change anything on that front.
Ms Rose succeeded New Zealander Ross Mcewan.
When Royal Bank acquired Natwest in early 2000, after launching a hostile bid for the London-based bank and prevailing in a protracted fight over the prey with first-mover Bank of Scotland, the venerable Edinburgh institution was very Scottish indeed.
The late Lord Younger, the former MP for Ayr who served as a minister under Margaret Thatcher and was nicknamed “Gentleman George”, was chairman of Royal Bank during the bid battle. Former Scottish Development Agency head Sir George Mathewson was chief executive. And Paisley-born Fred Goodwin was deputy chief executive. Scottish financial sector stalwart Benny Higgins held a senior executive role.
The City was fully behind the takeover of Natwest at the time.
However, even then, it seemed Natwest was being a bit unfairly maligned. The appetite for it to be taken over seemed to hinge largely on the view that Natwest was somehow flabby, and had not cut its costs enough.
This was an era in which there was a developing appetite in the City for lower capital ratios, coupled with a clamour for the likes of share buy-backs by banks to supposedly return value to investors. This demand continued up until the financial crisis. Capital ratios that had long been regarded as prudent were mocked as a sign of inefficiency. There was, obviously, a major reassessment of the situation after the crash.
From a shareholder-return perspective, the Natwest deal was a tremendous success for Royal Bank, with the integration of the two operations by the Scottish bank’s management team delivering what was promised.
The deal seemed for a while to disprove the long-held wisdom that you could not successfully pull off a hostile takeover in the banking sector. Conventional wisdom had tended to be that you needed to get right into the books of a bank over a lengthy period, working closely with the bid target, to form a full view and assess risk.
Royal Bank’s leading involvement in a consortium bid for Dutch banking giant ABN Amro years later could, however, be viewed as having proved the old wisdom right, in terms of whether hostile banking takeovers can work.
Unfortunately for Royal Bank, this huge deal was concluded in October
2007, less than a year before the collapse of US investment banking giant Lehman Brothers in September 2008. The
Lehman collapse got the global financial crisis under way in earnest. Signs of the developing crisis had, of course, been evident since the summer of 2007.
The rest, as they say, is history.
Royal Bank had to be bailed out to the tune of tens of billions of pounds by the UK Government in late 2008 and early 2009. More than a decade on, the UK Government retains a majority stake in the bank.
In autumn 2008, then Bank of Scotland owner HBOS had also found itself on the brink, and was rescued through a takeover by what was then Lloyds TSB, with the enlarged entity receiving massive
UK Government support. The Government stake in what became Lloyds Banking Group was subsequently sold, returning this institution entirely to private ownership.
There is no doubt that Royal Bank’s near-collapse was dramatic, and that the after-effects have been huge.
Sadly, under the majority ownership of the Government, Royal Bank has retrenched back to the UK, selling off large overseas operations including interests in the US. It has thus found itself largely dependent on a UK economy that has been in relatively grim shape for more than a decade.
Royal Bank has cut costs dramatically and axed branches, and, as a survey published this week by the Competition and Markets Authority confirmed, it has a lowly position in customer-service ratings from consumers and businesses.
It is difficult to imagine that the costcutting and the customer-service issues are unrelated. It is also worth noting Royal Bank came bottom of the table for branch services in terms of how these were rated by current-account customers.
The Royal Bank of Scotland brand will, thankfully, remain on high streets north of the Border even after the parent company’s rebranding later this year. This is some comfort, given the planned disappearance of the Clydesdale Bank name from the high street following parent group CYBG’S takeover of Virgin Money. Under chief executive David Duffy, who came to Glasgow-based Clydesdale from Allied Irish Banks, the Virgin Money brand will prevail on the high street as well as having been chosen at parent-company level in the enlarged group.
However, what should we make of the planned change of parent-company name at Royal Bank?
Having reflected on this, and notwithstanding the southward shift of key decision-making within Royal Bank, the change of parent-company name to Natwest is a big deal.
When considering this matter, it is important to remember Royal Bank’s centuries in existence and not fall into the trap of taking a short-term view based on the last decade or so.
The bank was founded in 1727. Dispensing with Royal Bank as the parent-company name is obviously a sensitive issue, in the context of highlycharged debates over independence and Brexit in Scotland. And so it should be. The current name of this institution, at group level, reflects its Scottish roots and centuries of heritage.
In this context, it would be interesting to know what senior UK Government ministers think of the change from a Scottish to an English name.
Royal Bank has clearly had a grim time of it for more than a decade. However, it has been around for hundreds of years, and over centuries there tend to be, to put it euphemistically, ups and downs.
It is a dismal situation that those who are calling the shots want to change the name of this institution from Royal Bank of Scotland.
Unfortunately, though, the decision is typical of the type of short-termism we see so often in the corporate and political worlds these days, from leaders who should reflect on history as they look to the future.