Lloyds Banking Group plc (LON:LLOY) today made the following announcements regarding its strategic plan for 2018 to 2020 and result highlights for the year ended 31 December 2017.
‘I am delighted to announce today our strategy for the next three years which will transform the Group for success in a digital world.
Over the last six years the Group has made huge progress and has built many strong capabilities including the largest and top rated digital bank in the UK. As we enter the next phase of our journey our team is determined to further improve the business, enhance customer experience and deliver superior shareholder returns.
The external environment is evolving rapidly and I am confident that this exciting and ambitious plan, with the significant additional investment, will mean we remain at the forefront of UK financial services, and continue to deliver our mission of Helping Britain Prosper.’ – António Horta-Osório, Lloyds Banking Group – Group Chief Executive
Key actions of the 2018-2020 strategic plan:
· Transform the Group into a digitised, simple, low risk, customer focused, UK financial services provider
· Leverage our multi-brand and multi-channel model, including the UK’s largest digital bank and branch network, to be the best bank for customers
· Invest more than £3 billion in strategic initiatives, an increase of more than 40 per cent on the previous strategy, to further enhance customer propositions, further digitise the Group, maximise capabilities as an integrated financial service provider and transform the way we work.
Key outcomes and financial targets:
· Growth in targeted segments with strong statutory profit growth
· Operating costs of less than £8 billion in 2020 with cost: income ratio in low 40s as we exit 2020
· Asset quality ratio of around 35 basis points through the cycle and less than 30 basis points during the plan period
· Strong and superior returns (14-15 per cent return on tangible equity from 2019) on a higher CET1 capital base
· Strong capital generation (170-200 basis points per year pre dividend) will continue to drive attractive and sustainable capital returns
Strategy overview
Over the last six years we have successfully transformed the Group, restructuring and simplifying the business whilst enhancing customer experience, Helping Britain Prosper and significantly increasing shareholder returns.
We have made strong progress, leveraging the unique strengths and assets of the Group including our differentiated multi-brand strategy, our multi-channel propositions, market leading efficiency, and the largest digital bank and branch network in the UK.
As we look to the future, we see the external environment evolving rapidly. Changing customer behaviours, the pace of technological evolution and changes in regulation all present opportunities. Given our strong capabilities and the significant progress made in recent years we believe we are in a unique position to compete and win in this environment by developing additional competitive advantages. We will continue to transform ourselves to succeed in this digital world and the next phase of our strategy will ensure we have the capabilities to deliver future success.
Strategic priorities
We have identified four strategic priorities focused on the financial needs and behaviours of the customer of the future: further enhancing our leading customer experience; further digitising the Group; maximising Group capabilities; and transforming ways of working. We will invest more than £3 billion in these strategic initiatives through the plan period that will drive our transformation into a digitised, simple, low risk, customer focused UK financial services provider.
Delivering a leading customer experience
We will drive stronger customer relationships through best in class propositions while continuing to provide our customers with brilliant servicing and a seamless experience across all channels. This will include:
· remaining the number 1 digital bank in the UK with open banking functionality;
· unrivalled reach with UK’s largest branch network serving complex needs; and
· data-driven and personalised customer propositions.
Digitising the Group
We will deploy new technology to drive additional operational efficiencies that will make banking simple and easier for customers whilst reducing operating costs, pursuing the following initiatives:
· deeper end-to-end transformation targeting over 70 per cent of cost base;
· simplification and progressive modernisation of our data and IT infrastructure; and
· technology enabled productivity improvements across the business.
Maximising the Group’s capabilities
We will deepen customer relationships, grow in targeted segments and better address our customers’ banking and insurance needs as an integrated financial services provider. This will include:
· increasing Financial Planning and Retirement (FP&R) open book assets by more than £50 billion by 2020 with more than 1 million new pension customers;
· implementing an integrated FP&R proposition with single customer view; and
· start-up, SME and Mid Market net lending growth (more than £6 billion in the plan period).
Transforming ways of working
We are making our biggest ever investment in people, increasing colleague training and development by 50 per cent to 4.4 million hours per annum and embracing new technology to drive better customer outcomes. The hard work, commitment and expertise of our colleagues has enabled us to deliver to date and we will further invest in capabilities and agile working practices. We have already restructured the business and reorganised the leadership team to ensure effective implementation of the new strategy.
Financial returns
The UK economy has proven resilient and going forward our plans and projections assume this performance continues with a steady increase in base rate to 1.25 per cent by the end of 2020.
The strategy outlined today will enable the Group to deliver strong statutory profit growth supported by targeted asset growth in key segments, a resilient net interest margin, lower operating costs, strong asset quality and lower remediation costs, whilst delivering strong capital generation and sustainable and superior shareholder returns.
Costs will continue to be a competitive advantage as we deliver market leading efficiency. We expect operating costs to be less than £8 billion in 2020. We also expect to achieve a cost:income ratio in the low 40s as we exit 2020, including future remediation costs. We continue to expect improvements in the cost:income ratio every year.
Asset quality remains strong and, given our low risk business model and the significant portfolio improvements in recent years, we now expect an asset quality ratio of around 35 basis points through the cycle and less than 30 basis points through the plan period.
We expect to deliver an improved return on tangible equity (RoTE) of 14.0-15.0 per cent from 2019 onwards on a higher CET1 capital base of c.13 per cent plus a management buffer of around 1 per cent.
Capital generation is expected to remain strong with 170-200 basis points of capital generation per year pre dividend and as a result we expect to deliver progressive and sustainable ordinary dividends whilst maintaining the flexibility to return surplus capital to shareholders.
Results Highlights
Strong financial performance with improved profit and returns on both a statutory and underlying basis
· Statutory profit before tax at £5.3 billion, 24 per cent higher, with a return on tangible equity of 8.9 per cent
· Underlying profit of £8.5 billion, 8 per cent higher, with an underlying return on tangible equity of 15.6 per cent
· Net income at £17.5 billion, 5 per cent higher with improved net interest income and other income; net interest margin increased to 2.86 per cent
· Positive operating jaws; market leading cost:income ratio improved to 46.8 per cent
· Asset quality remains strong with asset quality ratio of 18 basis points
· Continued lending growth in targeted segments including SME and the open mortgage book
· Strong capital generation of 245 basis points with a CET1 ratio of 15.5 per cent, pre dividend and share buyback
· CET1 capital requirement of c.13 per cent plus a management buffer of around 1 per cent
· Total ordinary dividend of 3.05 pence per share, up 20 per cent on 2016, and a share buyback of up to £1 billion representing an increase in total capital returns of up to 46 per cent. Total capital return of up to £3.2 billion.
A landmark year in which the Group made significant strategic progress and returned to full private ownership
· Successful delivery of second strategic plan: significant improvement in customer service, market leading digital proposition, targeted lending growth and Simplification savings ahead of target
· Completed acquisition of MBNA and announced acquisition of Zurich’s workplace pensions and savings business
· Significant progress made against Helping Britain Prosper targets since the beginning of 2015, with more than £35 billion of lending to first-time buyers and support provided to c.350,000 start-up businesses
· Restructured the business and reorganised the leadership team; ready for the next stage of the Group’s strategic journey
2018 guidance demonstrates confidence in the Group’s future prospects
· Net interest margin expected to be around 290 basis points
· Cost:income ratio expected to improve further
· Asset quality ratio expected to be less than 30 basis points
· Capital generation expected to be 170 to 200 basis points, pre dividends
Transforming the Group for success in a digital world
As also announced today, the next phase of our strategy will further transform the Group for success in a digital world. We will build on the strong progress of recent years and leverage the Group’s unique strengths. We will be investing over £3 billion in four strategic priorities: further enhancing our leading customer experience; further digitising the Group; maximising the Group’s capabilities; and transforming ways of working. These will drive our transformation into a digitised, simple, low risk, customer focused UK financial services provider and deliver:
· Sustainable and low risk growth: asset growth in targeted segments, a resilient net interest margin and an asset quality ratio of around 35 basis points through the cycle and less than 30 basis points through the plan period
· Continued development of an integrated Group proposition for retirement savings and investment
· Market leading efficiency: targeting operating costs less than £8 billion in 2020; cost:income ratio in the low 40s exiting 2020 including remediation costs, with improvements in the cost:income ratio every year
· Superior returns and lower cost of equity: targeting strong statutory profit growth and an improved return on tangible equity of 14 to 15 per cent from 2019, on a higher CET1 capital base of c.13 per cent plus a management buffer of around 1 per cent
· Strong CET1 capital generation: targeting 170 to 200 basis points of capital generation per year pre dividend
· Attractive capital distribution policy: progressive and sustainable ordinary dividends whilst maintaining the flexibility to return surplus capital to shareholders.
