Some of my peers are saying that these massive digital investments are one-offs and they will go down. I disagree
Lloyds Banking Group still suffers from too much bureaucracy in chief executive António Horta-Osório’s eyes, despite a cost-to-income ratio in the 40s, more than 10 percentage points lower than the national and European average. Lloyds, after all, is only midway through its three-year plan to deploy technology to lower 70% of its cost base.
Yet the future strength of Lloyds’ franchise largely depends on the £3 billion it has earmarked for discretionary investments in digital banking, including retraining staff, over the next three years.
That is on top of the cost of maintaining its IT systems and roughly as much as the combined venture capital investment in UK fintech companies in each of the last two years, says the chief executive, and Lloyds already has the country’s biggest market share in retail banking.
Furthermore, Horta-Osório sees UK bank regulation, and Lloyds, at the forefront of open banking.
While the best-known neobanks mark up losses to gain market share, Lloyds has a return on equity that is comfortably among the highest in European banking, at about 14%.
“The cost-to-income ratio has become an obsession of mine,” says Horta-Osório. “It’s a competitive advantage that will be a strategic advantage. Some of my peers are saying that these massive digital investments are one-offs and they will go down. I disagree.
“Customers want more products, quickly and cheaper. Digital investments are an ever-rising trend, so your business-as-usual costs need to be lower.”
Lloyds will therefore have more money to invest in its future because it is ahead of its peers in terms of its cost culture, according to Horta-Osório. His attitude is that costs in large organizations such as Lloyds will naturally proliferate, so it is an important element of the chief executive’s role to make sure a regular check is kept on them.
“Costs are like weeds, if you don’t cut them, they keep growing,” he jokes.
This is something banks need to worry about even in boom times, when higher revenues might mask underlying inefficiencies.
Early this decade, the impending march of fintech and especially mobile banking was not as obvious as it is in 2019. Even so, Horta-Osório had only been at Lloyds a couple of years when he carved out a digital position on the executive committee. Today Lloyds has 20% of UK bank branches’ new business volumes and 21% of sales through digital channels.
“Despite all the competition in digital banking, the biggest digital bank in the UK is Lloyds,” he beams.
When Horta-Osório joined Lloyds as chief executive in 2011, UK retrenchment was an immediate necessity, as the bank was on its knees financially. As a strategy, however, concentrating on the UK, and on the real economy – households, small businesses, insurance – was better for the business.
The bank has been able to deploy energy and investment where it could be strong, taking advantage of its large domestic market share, its local brands and client history, including in digitalization.
A convenient by-product, especially during the post-crisis backlash against light-touch regulation, has been that the bank has had to deal with far fewer banking regulators and supervisors.
Thanks to Brexit, the risks for Lloyds are again skewed to the downside – and this is more worrying for investors due to its national focus.
Meanwhile, Horta-Osório agrees with Euromoney’s proposition that – as a longer-term trend – digital technology might make it easier to reap synergies across borders in retail banking. He says this is especially true in northern Europe and that millennial clients are easier to serve internationally. For the most part, however, retail and commercial banking will remain an overwhelmingly national activity.
Reducing the number of branches to zero today could be disastrous, not least as local hubs are still vital for long-term relationships and assessing credit risk in small and medium-sized enterprise banking. Lloyds has increased its market share in the SME sector in recent years, he says, partly as a result of its investment in SME centres across the country.
“It’s critical to have relationship managers and credit officers who know the customer,” he argues. “Looking only at the accounts doesn’t tell you the whole story in SMEs... I want to maximize the branch advantage for as long as possible.”