Lloyds Bank, more than any of the high-street lenders, is pinned squarely to the UK economy. When consumers cheer up, the bank does, too. It showed in António Horta-Osório’s voice at Thursday’s full-year results. Last year was about political and economic uncertainty. Now Britain, says AHO, knows where it is going. And so does the bank. Sort of. Lloyds has reduced its profitability targets for next year. Returns on tangible equity (ROTE) will slip to about 12 to 13 per cent. Intense competition is eating into net interest margins, the difference between what the banks pays to borrow and what it earns from lending. Bad loans are inching up.
Nonetheless, says AHO, wages are rising, unemployment is low, the government’s infrastructure spending will unleash billions and business confidence is recovering. Lloyds’ shares, contrary to many analysts’ bleary early-morning predictions, rose.
Would-be believers should still not underestimate the ability of UK high-street lenders to shoot off their own toes. Between 2000 and 2017 UK retail banks made more than £60bn in provisions to cover mis-selling of payment protection insurance, interest rate hedging products, endowment mortgages, packaged bank accounts, investment advice and card protection insurance. Lloyds, as the UK’s biggest offender, has made provisions of £22bn for PPI alone, bringing ROTE down to 7.8 per cent.
It will process its last compensation cheque for PPI this year. AHO promises the bank is reformed. Remediations — the annual cost of correcting bank mistakes — have been coming down steadily.
But lenders selling dull, low-margin and competitive banking services in a low-interest rate environment will always be tempted to create more lucrative products to flog to customers. In the past, the economics worked — banks could sell a lot, make a lot and know that only a small fraction of buyers would cotton on to the fact the product was unsuitable and complain. Now, watchdogs, abetted by the claims industry, are quicker to spot mis-selling and demand redress.
Sales of advice on pension transfers, small business financing, high-cost short-term lending and car finance are already on the Financial Conduct Authority’s to-do list. Lloyds, despite its low-risk lending portfolio, covers the waterfront on lending products and so is likely to be caught up, even if it is on the edges.
Viewed through one prism, Lloyds’ shares — on about 8 times forward earnings and at par with book value — look inexpensive compared with its peers generating less capital and lower returns. But viewed from another side, shares in UK high-street banks give investors a stake in the UK economy and a warrant on the next mis-selling scandal.
