AMONG the most hotly anticipated topics when Lloyds Banking Group unveils its new three-year strategic update this week will be the planned resumption of dividends and details of an expected branch closure programme as the industry goes increasingly digital.
However, most of the City smart money believes that while Lloyds boss Antonio Horta-Osorio will give greater clarity on accelerated “digitisation” in the sector – expected to result in up to 9,000 job losses across the group – nothing will be said on the dividend until the end of 2014.
It is understood the bank, which is still 25 per cent owned by the taxpayer, believes it would be premature to give payout guidance ahead of the results of the Prudential Regulation Authority’s banking stress tests on 16 December and before the Financial Policy Committee’s upcoming leverage ratios are known.
Lloyds, which also counts Bank of Scotland and Halifax among its high street brands, was banned by the European Commission from paying dividends as the price of its £20 billion taxpayer bailout in the financial crash. But the group has strongly bolstered its balance sheet since Horta-Osorio took up post in spring 2011, and has been heavily cash-generative in the past two years.
“It is likely to be a little frustrating on the dividend, but totally expected in the circumstances,” said one analyst. “It would create a hostage to fortune to say there would definitely be a dividend for the first time since 2008 ahead of these regulatory unknowns.”
The broader leverage ratio is the amount of capital a bank must have to back its loan book but, unlike the core tier one capital ratio, it gives no weighting to the riskiness of those loans.
Credit Suisse sums up the general City expectation in a note that says: “We see relatively limited scope for the outcome of the Financial Policy Committee’s leverage ratio review to act as a material constraint on Lloyds’s ability to resume and pay dividends going forward.”
Lloyds is also undergoing European Banking Authority capital stress tests, the results of which are expected on 26 November. However, these are widely seen as less onerous in their regulatory demands than the gold-plated UK regulatory model.
Dividend resumption is viewed as a pivotal factor in inclining the government to include small private investors in any further rundown of the taxpayer stake.
Previous tranches of shares sold by the government have focused on institutional investors. Some analysts believe Lloyds will delay the announcement of a restored dividend until its full-year results in February. Nomura has pencilled in a forecast of an initial token payout of 0.5p to 1p a share.
Tuesday’s strategic update, which will be accompanied by the bank’s third-quarter trading results, is likely to put more flesh on the bone of Horta-Osorio’s determination to accelerate a “bricks and clicks” offering for customers. He has said that many more customers now do their banking on tablets and mobile phones.
The group is the UK’s biggest retail bank, running more than 2,000 branches currently through its Bank of Scotland, Halifax and Lloyds branches. There is thought to be an internal debate at the bank as to whether it should detail this week the actual number of branches that will close between now and 2017.
One fund manager said: “Because of the contentiousness of the issue of branch closures, it is questionable whether a hard figure will be put on the strategy.
“My guess is Lloyds will say this week that it is not an either/or situation but a complementary offer to meet customers’ banking needs in the 21st century. It might be a bit bland.”
It is understood Horta-Osorio aimed the first three-year strategic plan between 2011 and 2014 at stabilising and strengthening the bank after the crash and ill-starred acquisition of Bank of Scotland and Halifax parent HBOS, while the focus for the next three years is about renewed growth.
Further cost-cutting targets are also expected to be unveiled this week. If the axe falls as expected on a further 9,000 jobs – about a tenth of its entire workforce – it will take the total payroll cull at Lloyds since the financial crisis to 45,000.
There is speculation that the group may unveil an ambitious new cost-to-income ratio target in the mid-40s, from 52 per cent now. However, some analysts believe management will be more cautious and move towards a target seen as more achievable, of circa 49 per cent by 2016.
As part of the wider refocusing, Horta-Osorio and Lloyds finance director George Culmer are also expected to highlight that the bank plans to target higher-yielding assets over the next three years.
One analyst said: “Lloyds, largely through its Halifax brand, is Britain’s biggest mortgage lender. Mortgages represent more than 60 per cent of the bank’s overall loan book.
“And the recent Bank of England credit conditions survey showed that mortgage margins are coming under pressure. I would expect management to stress this week that Lloyds wants to grow by contrast in areas where it is seen as under-represented, such as consumer finance, credit cards and insurance.”
Ian Gordon at Investec said: “Consensus currently expects underlying costs (after the spin-off of TSB) to stabilise at circa £9bn between 2015 and 2017, though the new purge may well herald new lower targets.”
Lloyds to announce profit
Alongside its strategic update, Lloyds Banking Group is expected to reveal that it has made an underlying pre-tax profit of about £1.8 billion in its third trading quarter.
The bank is thought to have received a tailwind from a continuing improvement in bad debt levels, with a similar fall in impaired loans expected after the 58 per cent drop in the bank’s first trading half.
Lloyds’ net interest margin (NIM) – the difference between what it charges on loans and pays on deposits – is expected by City analysts to come in at 2.5 per cent over the three months to September. This would put the group on track to meet its full-year target on net interest margin of 2.5 per cent.
Lloyds is also expected to take a further charge for payment protection insurance (PPI) mis-selling of £450m, taking its total bill to about £10.8bn.