Comments last week from Lloyds’ new chief executive, António Horta-Osório, warning that it will take “three to five years” to turn fortunes around at the retail bank have focused attention on the scale of the challenges facing the lender. And Lloyds could be worse off than its key UK rivals.
First, there’s the impairment problem. Unlike most UK banks, where bad debts are gradually falling, Lloyds' first quarter impairment charge rose 8 per cent year-on-year to £2.6bn. That was £500m more than management’s expectations and largely reflected provision hikes against its struggling Irish loan book. Indeed, broker Evolution Securities estimates that Lloyds' overseas operations - basically Ireland and Australia - could force it to eventually bolster provisions by a further £5bn.
Then there are Lloyds' funding costs. The bank has a large portfolio of central bank funding, which matures in the next 18-24 months, as well as a short duration book of other wholesale funding. Extending wholesale maturities and replacing central bank funds with new wholesale facilities will be costly. Lloyds' retail deposit base isn’t large when compared to its commercial loan book, either, and management is expected to refocus that - which will also prove costly. “We calculate that the total cost of the [funding] transformation would be around £5bn,” estimate analysts at Evolution.
Still, there could be good news regarding branch disposals. EU competition regulators require Lloyds to sell 600 branches but, in its report in April, the Independent Commission on Banking suggested that Lloyds should sell even more. But management is pressing ahead with plans to sell just the original 600 with potential buyers such as Virgin Money, the Co-operative Bank and National Australia Bank reportedly keen. Significantly, there has been no obvious government attempt yet to influence that process to reflect the potential need to sell more branches - suggesting government ambivalence towards that suggestion. It’s also reported that Treasury officials may not see further disposals as workable.
