On Thursday, the British bank exceeded analysts’ expectations by reporting a pre-tax profit of £3.9 billion on a net income of £7.6 billion in the first half of 2021. Analysts had expected to see profits of £3.1 billion on revenues of £7.35 billion.
In the first six months of 2020, the bank saw losses of £602 million as the UK endured the first wave of the coronavirus pandemic. Like other banks and lenders, Lloyds allowed billions as a buffer to cover a feared surge in bad debt linked to the coronavirus pandemic, but has since unlocked £837 million from the buffer as the situation in the UK appears to improve amid a successful vaccine rollout. This led to a net half-year gain of £656 million on provisions.
The bank has raised its forecasts for the UK economy and has increased its guidance for performance in 2022, with Lloyds now expecting to deliver a return of equity of 10%.
Lloyds is the biggest mortgage lender in the UK and has benefited significantly from the property market boom amplified by the stamp duty holiday. The bank reported June as the biggest month for mortgage completions as the end of the stamp duty holiday drove a surge in activity on the property market. So far this year, Lloyd’s has lent £9 billion to first-time buyers. Its mortgage book now stands at an impressive £12.6 billion.
As part of what is becoming a surprise leadership overhaul at the bank, a statement released Monday also suggested that former investment banker Robin Budenberg will be put in place as the lenders new chairman. If this happens, Budenberg will replace Norman Blackwell, who had discussed leaving the bank this year.
The surprise departure of Horta-Osorio scheduled for the end of June next year, poses more problems for Britain’s biggest mortgage lender as it wrestles with the economic recovery from Coronavirus pandemic and potentially one of the deepest recessions in centuries. The 56-year-old from Portugal, was seen by many as a steady hand at Lloyds, steering the Bank to profitability and full private ownership following a bailout during the financial crisis. Although his pay may sometimes have caused some negative column inches and discussions, the 56 year old will leave with a stellar reputation in the banking community.
In announcing the departure a year in advance, Lloyds will hope that this will leave plenty of time for the board to secure an experienced successor and ensure a smooth transition. The annoncement touched upon the fact that the banking giant will be considering internal and external candidates as they begin their search for a new chief executive in the near future.
During his tenure, Horta-Osorio cut thousands of jobs and managed a long-running and costly response to a scandal where British banks mis-sold insurance to consumers. He also pushed into wealth management and insurance as a way to diversify a revenue stream heavily dependent on the British economy and mortgage borrowers.
Lloyds booked a provision of 1.4 billion pounds ($1.75 billion) for soured loans in the first quarter as the coronavirus lockdown crushed economic growth and caused the bank to scrap previous targets. Its shares have also suffered as the Bank of England pushed lenders to scrap their dividends amid the pandemic.
Lloyds have been due to announce their new strategic plan early next year, as their current one directed by outgoing CEO Horta-Osorio, which involved heavy investment in technology and cost-reductions comes to an end. It is unclear whether this will change their plans.
Although Horta-Osorio has suffered a few setbacks during his decade long stint at the bank, most notable when Lloyds cut his pay by 28% to 4.73 million pounds for last year and his handling of a recent whistleblower report into a fraud case, Lloyds will be disappointed to lose a chief executive who has broadly delivered excellent results throughout what has been a tumultuous time in the economic sector.
Lloyds shares rose about 2% in London trading, one of the smallest gains in a broad rally by the Whether by Horat-Osorio or the new CEO, Lloyds have some ground to make up, currently sitting 49% down this year, which ranks as the worst performance among Britain’s five major banks.
This article first appeared on our sister publication's website www.ceotodaymagazine.com
As part of Finance Monthly’s brand new fortnightly economy and finance round-up analysis, Adam Chester, Head of Economics & Commercial Banking at Lloyds Bank, provides news and opinions on the rise in inflation, the UK’s weakness in productivity, and employment & GDP.
The anniversary of the UK’s decision to withdraw from the European Union has now passed, and who could have imagined the political fallout that would ensue?
One year on, the formal Brexit negotiations have only just begun, yet the nature of those negotiations and their ultimate destination remain unclear.
Despite all this uncertainty, it is remarkable how well business sentiment and the economy has held up.
The resilience of the UK economy however, and UK financial markets, has prompted a very different response from the Bank of England than the one that followed the EU Referendum.
While the bank came out ‘all guns blazing’ last summer, the focus now is on when it will start to take that stimulus away.
Doves taking flight?
Bank of England officials have signalled that above-target inflation may not be tolerated for much longer.
Even Governor Carney – one of the more dovish members of the UK rate-setting committee – has rowed back a little on his earlier stance, suggesting that if the balance between growth and inflation continues to shift, ‘some removal of monetary stimulus’ is likely to be necessary.
The markets now have the August MPC meeting in their sights. That is when the Bank of England takes another detailed look at its GDP and inflation forecasts.
By then, not only is inflation likely to be much higher that the bank was previously forecasting in May, but the committee may also have to factor in the risk of some loosening in fiscal policy.
The decision will come down to the MPC’s assessment of the trade-off between growth and inflation.
BoE Deputy Governor Broadbent noted in a recent interview that there were many ‘imponderables’ and that he was ‘not ready’ to support a rate hike.
Meanwhile, Ian McCafferty underscored his credentials as the most hawkish member of the BoE’s rate-setting committee, arguing not only for an immediate quarter-point rise in interest rates, but also for the BoE to consider reversing its money-printing programme earlier than planned.
The productivity problem
While all eyes are on Brexit, it is easy to miss what is arguably an even bigger challenge for the UK – the weakness of productivity.
UK productivity (as measured by output per hour) contracted by 0.5% in the first quarter of this year, leaving it at its lowest since before the 2008 financial crisis.
By any measure this is a shocking performance.
There are various explanations for the UK’s disappointing productivity, and some are more benign than others.
Part of the reason may be simple mismeasurement. Recording the productivity of economies such as the UK with large service-sector industries, particularly financial services, is inherently difficult.
As the UK’s official statistics indicate, productivity in some sectors, including financial services, has performed significantly worse than other non-financial service sectors over the past decade. But this does not tell the whole story.
Productivity may have also deteriorated due to changes in the composition of capital and labour.
Since the financial crisis, low wage growth and heightened economic uncertainty may have encouraged more companies to hire new workers to drive output growth rather than undertake productivity-enhancing capital investment.
Going for growth
The rise in the UK’s GDP over the past decade has been driven, almost exclusively, by increases in employment and hours worked.
The UK’s latest labour market data underscores this point. Total employment grew by a stronger-than-expected 175,000 in the three months to May, while the unemployment rate dropped to a new multi-decade low of just 4.5%.
At the same time, pay pressures remain benign, with annual growth in overall pay slipping from 2.1% to 1.8% - the first time it has been below 2% since February 2015.
Based on current data, GDP is likely to have expanded by 0.3% in the second quarter, while total employment is predicted to have risen by 0.3%. As a result, productivity growth is projected to be zero.
The combination of a tightening labour market, weak productivity growth and benign pay pressures pose a major dilemma for the Bank of England.
For now, we expect the Bank to keep its powder dry, but it won’t take much further sign of economic strength to persuade it to reverse last August’s quarter-point rate cut.
As part of Finance Monthly’s brand new fortnightly economy and finance round-up analysis, Adam Chester, Head of Economics & Commercial Banking at Lloyds Bank, provides news and opinions on volatility in the uncertain market and the prospect of a hike in interest rates, both in the UK and the US.
Clearly, the last two weeks have seen political shocks with potentially far-reaching consequences for the UK’s economic outlook.
The aftermath of the General Election has introduced new uncertainty over the implications for Brexit though, so far, financial markets have taken it in their stride.
However, until there is a clearer sense of what the new minority government can achieve, UK financial markets and the pound are likely to be prone to sharp bouts of volatility.
Three wishes
The outlook for the UK’s Bank Rate seems to be changing by the moment.
The surprisingly close June vote on interest rates by Bank of England policymakers saw three of the rate-setting committee back a rise.
Governor Carney seemingly attempted to put a lid on the discussion by stating that now was not the time to raise rates. However, Andy Haldane, the Bank’s Chief Economist, subsequently said he was now close to voting for an interest rate hike.
This is particularly significant as, until now, Haldane was considered to be the arch dove amongst the Bank’s rate setters. Moreover, it is the first sign of a divergence in views between the current permanent Bank employees on the committee.
Up until now it’s only been the so called external members who have voted for a hike. Is that about to change?
Markets certainly think there is something new in the air, as can be seen by the implied probability now put on a 2017 interest rate hike. That has gone up from below 10% just over a week ago to about 50%.
What is most surprising about this sudden shift in expectations is that economic conditions are arguably little changed. Once you also factor in political uncertainty, including the unexpected result of the general election, then on the face of it, the case for staying put seems strong.
But the hawks amongst Bank rate setters had previously indicated that they have limited tolerance for above-target inflation.
Close to the limit
Two factors suggest that the limit may be close to being breached.
First, Kristin Forbes, one of the hawks, has noted in recent research that the effects of an exchange rate generated inflation shock can persist. This questions whether the Bank is right to prioritise domestic pressures.
Second, the eventual impact on wages of what looks to be an increasingly tight labour market remains a concern. The UK unemployment rate is now at its lowest level since the mid-1970s and there are signs that this is having an impact.
On balance, we expect the Bank to keep interest rates on hold for now. Nevertheless, this is a closer call than for some time.
Over the next few weeks, markets will be paying particular attention to any comments from those Bank policymakers who have yet to make their position clear.
It will be an interesting run up to the next policy announcement on 3rd August.
Fed up again
In the US, a quarter-point rise in interest rates was widely expected, and subsequently delivered.
The Federal Reserve also stuck to its previous ‘dot plot’ forecast to raise interest rates, anticipating another quarter-point rise this year, and three more in 2018, with the key policy rate expected to settle around 3.0% in 2019.
In pre-announced plans, the Fed intends to start unwinding its balance sheet. For the moment, it anticipates deflating its asset holdings by $10bn a month from later this year, rising in small increments every three months to $50bn
Despite this, US financial markets may have other ideas – as they continue to pretty much ignore the Fed’s guidance. The markets are only fully priced to one more quarter-point rise by the end of next year.
With signs of more mixed growth emerging recently and a weakening of core inflation, the markets clearly think the Fed has got it wrong.
This misalignment can only last so long. Either the Fed will have to eat humble pie, or the US, and by extension global, bond markets could be in for a much more testing second half.
