1st July 2011

Horta-Osorio manifesto for Lloyds Banking

Opinion

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The main headlines on the changes proposed at Lloyds Banking have centred around the £1.5bn (€1.7bn $2.4bn ¥195bn Y15.5bn) per annum expense savings and 15,000 job cuts proposed. The document put forward by CEO, Antonio Horta-Osorio, exactly 3 months after taking office is more than that, it is a manifesto and a the laying out for all stakeholders of a strategy. In the late 1990's and early 2000s, Lloyds TSB, had a focus on efficiency and cost cutting. This document whilst announcing a massive further cost cut, also succinctly details the shape and focus for the group and gives for the first time in a long time a sense of long term direction for the group. There are however some considerable difficulties with the proposals and perhaps the need for a Plan B to cover at least part of them.


The tighter focus on what will be core in future is not altered in any major way. It is true that the document announces the withdrawal from around one half of the countries it currently operates in outside of the UK - but these are small operastions. Indirectly suggested is a reduction in wholesale banking with the statement that in future it will "focus will be on developing deeper client relationships and building transactional banking and fixed income capabilities to support our UK customers". Plus there is delivery of the EU required branch sell of, Project Verde, and the sale of other already designated non-core assets. Notable for being retained within the plan is Scottish Widows, the Halifax and Bank of Scotland brands with promises for investment in all three. Elsewhere the benefits of in-house manufacture of bancassurance products are extolled. The plan also is for a significant expansion of the wealth business handling triple the number of customers. Even with more use of 'digitally delivered products (i.e. internet and mobile) the wealth expansion would seem unlikely without additional staff. The cuts in employees have therefore to be achieved from middle-management and IT, with the statement that there will be a material reduction in the number of applications within the group. There is a promise of no off-shoring of full time jobs to cause any distortion. It also has to be achieved within the remit of the document opening statement stating "Our aim is to become the best bank for customers."


There is a further expense reduction strand through the reduction in the number of suppliers to the bank from around 17,000 to under 10,000 with the intention to reduce the costs for the items by 15%. This is both an extremely highly ambitious target and one that may run into some political and media opposition as likely to lead to British SMEs losing out on business in favour of global corporates. Other attempts at similar reductions have often found that products considered to be the same from different sources by consultants turn out to have important differences and cannot so easily be substituted.


The £1.5bn savings has to be achieved from a total of £13.3bn total expenses in 2010, of which only £10.9bn was said to be true expense when distortions from the HBOS acquisition were removed. Therefore the plan is seeking a reduction of 14% on the latter figure. The date for achieving the saving is 2014. The cost of achieving the reduction is £2.3bn and the bank states that achieving the saving will reduce the bottom line profit by £500m in the years through to 2014. Lloyds are also charging £3.5bn this year, pre-tax, for PPI insurance compensation.


Whilst offering no quick term benefit to shareholders the clear strategy seemed to be appreciated. The stock price was up over 8% around midday of the day of the announcement (30th June).