SWOT Analysis on Lloyds Banking Group Plc
COMPANY OVERVIEW
Overview
Lloyds Banking
Group plc (Lloyds or 'the group') is a leading UK based financial services
group,
offering a wide
range of banking and financial services in the UK and a limited number of
locations overseas.The group is headquartered in Gresham Street, London, UK and
employed 97,091 people including 4,303 agency staff, as on 31 December 2012.
The company
recorded revenues of £38,906 million ($61,671.1 million) during the financial
year
ended December
2012 (FY2012), an increase of 44.9% over FY2011. The operating loss of the company
was £570 million ($903.5 million) in FY2012, as compared to an operating loss
of £3,542 million ($5,614.5 million) in FY2011. The net loss was £1,427 million
($2,262 million) in FY2012, as compared to a net loss of £2,787 million
($4,417.8 million) in FY2011.
SWOT ANALYSIS
Overview
Lloyds Banking
Group plc (Lloyds or 'the group') is a leading UK based financial services
group,
offering a wide
range of banking and financial services in the UK and a limited number of
locations overseas. Lloyds has strong market position in the UK. Adequate
liquidity and capital strength cushioning the group against market risks
However, regulatory changes in UK and Europe could impact the group's revenue
and profitability.
Strengths
Strong market position in the UK financial services
industry
Lloyds holds a
strong market position in the UK financial services industry. Following, the
acquisition of HBOS in 2009, Lloyds became the leading retail bank in the UK,
with market-leading positions in current accounts, savings accounts,
residential mortgages and unsecured lending, as well as being a leading credit
card issuer, with the core brands being Lloyds TSB, Halifax and Bank of
Scotland. The group is a leading bancassurance provider in the UK through
Scottish Widows and Clerical Medical. Strong market position in the UK
financial services industry provides revenue and profit visibility.
Adequate liquidity and capital strength cushioning
against market risks
The group's
liquidity is considered to be adequate and its capital strength is considered
to be strong. Customer deposits remain Lloyds' largest, and most stable, source
of funds, amounting to £422.5 billion ($669.7 billion) at December 2012,
accounting for 64.2% of the total funding of £658.6 billion ($1,044.0 billion).
At the end of
2012, the group's primary liquidity ((UK Gilts, US Treasuries, Euro AAA
government debt; unencumbered cash balances held at central banks), was £87.6
billion ($138.9 billion). In addition, the group continues to hold secondary
liquidity worth £117.1 billion ($185.6 billion) at the end of 2012. The
government owns approximately 39.2% of the group's shareholding. The group's shareholders'
equity increased from £43.3 billion at the end of 2009 to £43 .9 billion at the
end of 2012. Tier 1 ratio increased from 9.6% at end 2009 to 13.8% at end 2012
while total capital ratio increased from 12.4% at end 2009 to 17.3% at end
2012. The group's adequate liquidity and capital strength cushion the group
from adverse market risks.
Restructuring initiatives reducing riskiness in
business profile
Lloyds has taken
several restructuring initiatives in the recent past. For instance, the group has
sold several non-core businesses such as HBOS Employee Equity Solutions,
Ramesys (Holdings) Ltd, and Hill Hire plc. The group has also simplified its
business portfolio in the past few months. It has also greatly improved its
cost management through instituting a rigorous process overseen by a Cost
Board, which has helped it drive significant reductions in operating expenses.
To date it has announced the exit from operations in twelve countries. In
addition the group's integration programme has delivered single platforms
supporting the Halifax, Bank of Scotland and Lloyds TSB brands and, by the end
of 2012, had achieved more than £847 million run-rate cost savings. These
initiatives helped the group reduce its operating costs from £25,252.7 million
($40,028.8 million) in FY2009 to £15,931 million ($25,252.7 million) in
FY2012.The group's management believes that its restructuring initiatives could
reduce its operating costs further in FY2013.
Weaknesses
Deterioration in asset quality affecting profitability
In the recent
years, the group has registered significant deterioration in its asset quality.
Problem
loans as a
percentage of gross loans at Lloyds Banking Group accounted for as high as 8.6%
at
end December
2012. The total impaired loans was £46.3 billion in 2012.
At the same time
there was also a 4.8% decrease in gross customer loans from £642 billion in
2009 to £548.8 billion in 2011 due to the ongoing deleveraging. Increase in
problems is majorly attributable to the group's acquisition of HBOS plc.
Deterioration in asset quality has led to sharp increase in provision for loans
and consequently affected the group's profitability.
Relatively higher domestic exposure
The group's
exposure to the domestic economy i.e., the UK is relatively high. Unlike the
other major providers of universal banking services in the UK (Barclays, Royal
Bank of Scotland, and HSBC). For FY2012, the UK, the Barclays' second largest
geographic market, accounted for 31 % of the total revenues. For FY2012, The
UK, Royal Bank of Scotland's largest geographic market, accounted for
approximately 66% of the total revenues. HSBC's exposure to the UK and Europe
(ex-UK) was approximately 25.8% in FY2012. Whereas, the UK, Lloyds' largest
geographic market, accounted for above 90% of the total revenues. As a result,
the group's geographic risk is high.
Opportunities
Launch of Islamic banking likely to be a strong
growth driver
The group has
increased its focus on Islamic banking in the last two years. In January 2008,
the group launched Islamic Nostro Account, allowing banks to move money around
the world on behalf of their individual and business clients in keeping with
Shariah law. The account adds to a suite of Islamic products and services
Lloyds TSB has launched in the past two years. The UK is home to approximately
two million Muslims.The treasury in UK is working on a series of measures to
legalize services including savings accounts and mortgages complying with
Shariah, the legal code of Islam, which prohibits the practice of paying
interest. The Islamic mortgage market is expected to be worth more than £3
billion by 2013. The UK Islamic banking market is divided between HSBC, the
Islamic Bank of Britain, and West Bromwich Building Society leaving enough
scope for other banks to share the emerging opportunities in this segment of
banking. The positive outlook for Islamic banking is likely to translate to
increased market penetration opportunities for Lloyds TSB.
Rising UK mobile
banking usage likely to help the group improve customer base and cost structure
The number of British consumers using a mobile phone to manage their finances
is estimated to have grown at an annual rate of 25% in 2011. Mobile banking is
projected to grow at a compounded annual growth rate of 30% during 2011–14.
Lloyds is one of the leading mobile banking services providers in the UK. Going
forward, mobile banking usage is expected improve significantly. Increasing mobile
banking usage will help the group bring down operational cost per branch and
also attract more customers.
Extension of quantitative easing could revive
mortgage lending
The Bank of
England (BoE) has announced plans to extend Quantitative Easing (QE) program.
In the absence of further scope for key interest rate reductions, QE has been
one of the recent strategies followed by central banks across the world to
revive growth in their respective economies. In simple terms QE means releasing
more money into the economy. In 2009, BoE’s QE (QE1) was worth £200 billion.
When QE1 was absorbed into the UK’s financial system there was a positive
impact on mortgage lending. In October 2011, BoE announced a further £75
billion of QE, and it extended the program again in February 2012 by £50
billion. In July 2012, BoE said it would inject another £50 billion into the
economy, taking the total size of the quantitative easing program to £375
billion. Thus monetary base in the UK is likely to go up facilitating banks
such as Lloyds to increase mortgage loan production.
Threats
Regulatory requirements affecting market share
Lloyds, in
return for state aid, had to accept European Commission's proposal to dispose
by November 2013 of a retail banking business with at least 600 branches, a
4.6% market share of the personal account market in the UK and approximately
19% of the group's mortgage assets. Lloyds estimates this will equate to
approximately £70 billion of customer loans and £30 billion of deposits.
Moreover, the April 2011 report of the Independent Commission on Banking also
contains a draft proposal for greater divestments by Lloyds. Any further
divestments could be detrimental to the group's market share, and its
competitive positioning.
Regulatory changes regarding DTAs could have adverse
impact
In accordance
with IFRS, the group has recognized deferred tax assets (DTAs) on losses available
to relieve future profits from tax only to the extent that it is probable that
they will be recovered. DTAs are quantified on the basis of current tax
legislation and accounting standards and are subject to change in respect of
the future rates of tax or the rules for computing taxable profits and
allowable losses. Failure to generate sufficient future taxable profits or
changes in tax legislation or accounting standards may reduce the recoverable
amount of the recognized DTAs. In April 2011, the UK Government commenced a
staged reduction in the rate of UK corporation tax from 28% to 23% over a
four-year period. Such a change in the applicable tax rate will reduce the
recoverable amount of the recognized DTAs. There is currently no restriction in
respect of DTAs recognized by the group for regulatory purposes. Changes in
regulatory capital rules may restrict the amount of DTAs that can be recognized
and such changes could lead to a reduction in the group's Core Tier 1 capital ratio.
In particular, on December 16, 2010, the Basel Committee published the Basel
III rules setting out certain changes to capital requirements which include
provisions limiting the ability of certain DTAs to be recognized when
calculating the common equity component of Tier 1 capital. The implementation
of the Basel III restrictions on recognition of deferred tax assets within the
common equity component of Tier 1 are subject to a phased-in deduction starting
on January 1, 2014, to be fully effective by January 1, 2018. Regulatory
changes regarding DTAs could have an adverse impact on the group's financial
performance and position as well.
Proposed regulations under framework
UK government is
considering various regulations to control and regulate the banking industry.
The Parliamentary Commission on Banking Standards (PCBS) was recommended to
conduct pre-legislative scrutiny on the draft Banking Reform Bill. The PCBS
published its preliminary report in December 2012, containing the Commission’s
consideration of the Government’s draft legislation which gives effect to the
recommendations of the Independent Commission on Banking (ICB). The PCBS viewed
at Ring fencing, one of the UK Government’s main proposals for increasing
financial stability. Further, various potential changes to accounting standards
are under consultation. These standards are presently scheduled for
implementation between 2015 and 2018 and have potential to enhance substantial
volatility to the Group’s reported results and capital.The proposed regulations
are likely to affect the banking industry in the UK.
If you want SWOT Analysis Report on Lloyds Banking Group, than contact Mahasagar Publications.
