Strategy update, Q3 results analysis and outlook
We were delighted to host the Head of Investor Relations, Douglas Radcliffe and Head of Group Strategy, Corporate Ventures and IR Director, Carla Antunes da Silva at the Lloyds Banking Group plc (LBG) webinar for private investors. The recording can be watched here.
Carla Antunes da Silva started by giving an outline of the LBG strategy. LBG is the UK’s largest financial provider with 26 million customers and the largest branch network and digital presence in the UK. LBG’s model is to be a multi-channel and multi-brand proposition with low risk participation in the market and strong capital discipline. They are number one in the UK in mortgages, credit cards and personal current accounts by market share. Insurance, wealth and banking are the three core pillars of the business.
2020 has seen the overlay of a Covid-19 recovery plan on top of the third stage of the Group Strategy Review which is due to complete in 2021. Along with provisions to ensure the impact of the pandemic is dampened, inclusivity, sustainability and diversity are key areas for LBG to develop. (For those interested, the Group‘s ESG presentation can be found here). In this third phase the focus has been to transform the group digitally. Despite a challenging outlook and the headwinds of Covid-19, the group is still delivering on the review targets. Key to digitalisation is investment to produce strong and superior returns which has continued through the period even if dampened. Investment is down 16% YoY due to the pandemic.
In 2020, the pandemic accelerated the shift to digital in terms of telephony and video conferencing as well as online banking. LBG now has 17.1m active users, up 1.4m in the first 9 months of 2020. This equated to 3.1bn logons. Customer satisfaction rose 8% YoY in this period showing that the shift to digital is not hampering the quality of service.
Douglas Radcliffe moved the attention to the Q3 results and current performance. LBG will have a new Chair, Robin Budenberg as of January 2021 and the new CEO, Charlie Nunn will join from HSBC in the Spring as Horta-Osorio leaves for Credit Suisse. If there is a gap in management the CFO, William Chalmers, will be the acting Group CEO.
Q3 showed an encouraging recovery from the impact of the pandemic. A reduced impairment charge, increased business volumes and continued cost reductions have all contributed to the uplift in performance. The mortgage book saw £3bn net growth in Q3 which feeds a strong Q4 pipeline. Both consumer finance and motor finance have been hit by Covid-19 but results from these two areas are at the better end of forecasts.
The Group’s Net Interest Margin is down 254bps YoY due to lower rates, changes in the asset mix and actions take to support customers. This is expected to continue onto Q4 with the margins settling at 250bps for the full year. The Net Interest Income is down 13% but strong lending performance, overdraft margins in personal and commercial will support the NII in Q4. 2021 is expected to see more of a recovery in these areas.
Cost reductions have been a key focus for the duration of the decade-long strategic reviews and YTD total and operating costs are down 4%. Since 2011 and the start of the decade long strategic review costs overall are down 25%.
Douglas was keen to highlight that the impairment charge provisions built into the numbers do not reflect actual losses, rather an anticipation of future losses in 2021. Shoring up the balance sheet to withstand the fall out of the pandemic reflects the ethos of the bank to maintain strong capital discipline. To this end, the balance sheet is robust reflecting the prudent approach to lending and being well-secured.
Further detail on the lending book shows that LBG have de-risked the portfolio over the last 10 years as part of the 3-part review of the group. A strategy that has paid off in Covid times.
A return to profitability with Q3 statutory profit after tax of £688m has been a huge achievement. Douglas was clear that uncertainties remain and will persist whilst the pandemic continues. The Group’s performance is inextricably linked to the UK economy. The 2020 guidance reflects the response during 2020 to the challenging economic environment and current macro-economic assumptions.
Dividends will be reassessed at the end of the financial year in February 2021. Regulatory requirements currently bar all UK and European banks from paying dividends. However, shareholders are recognised as key stakeholders in LBG and this position will be looked at by the board in conjunction with the capital position and the outlook at the end of the financial year. The new quarterly payment schedule was due to initiate in June 2020 and will commence once the green light comes from the regulators subject to capital and outlook.
The pandemic has highlighted the quasi situation of UK banks as not only commercial enterprises, but an establishment that must take into consideration the demands of society. Carla reflected on this point to show that both points are not mutually exclusive, and the Board believes Return On Equity must exceed the Cost of Equity in the medium term as a key principle. This supports the idea that the Group is run as a business however, the wider impact of operations is not taken lightly by management.
International expansion is at the fringe of the company’s plans. LBG is a UK based and UK focussed business and management want to focus on optimising the UK growth opportunities. All inorganic and organic growth opportunities are looked at.
Branch closures, a hot topic for many, was addressed by Douglas. The use of branches is reviewed on customer usage and trends. So yes, there have been closures however, LBG is committed to keeping their position as the market share leader in open branches serving customers ahead of their peer group.
Fundamental to Lloyds is the concept of ‘helping Britain prosper’. This is not a new tenet for management and has been part of the 10-year strategy which they are 90% through. Covid-19 has highlighted this idea but Carla and Douglas feel that the ethos of the bank is firmly placed in this mindset and the pandemic has, in fact, shone a spotlight on the work they undertake.
The Q&A session threw up many questions which Douglas and Carla tried to cover in the time we had. The high turnout, long question list and engagement from the attendees is always welcomed by Lloyds Banking Group. This is the third private investor meeting they have initiated since last year. They are committed to all their shareholders and really do lead in demonstrating how to follow the Corporate Governance Code in an exemplary manner.
Well done to the LBG team and remember you can watch the recording of the webinar here.