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UNITED KINGDOM | |
Best Bank: Lloyds Banking Group | ||
Lloyds Banking Group remains the best bank in the UK, delivering strong returns to shareholders thanks to a market leading cost-to-income ratio that reflects the work of previous generations of senior management.
The bank runs multiple brands, including Halifax, Bank of Scotland, Scottish Widows, MBNA and Schroders Personal Wealth among others, all off an efficient IT platform.
For 2021, Lloyds reported a return on tangible equity of 13.8% coming off a high common equity tier-1 ratio of 17.3%.
The country’s two leading banks – Lloyds and Barclays – have very different business mixes. But after a great year of record profitability for investment banking, Barclays managed a 13.4% RoTE off a CET1 ratio of 15.1%. The two have similar net interest margins (254 basis points at Lloyds; 252bp at Barclays). So, the difference comes down a cost-to-income ratio of 56.7% at Lloyds for 2021, slightly ahead of its recent average. That compares to 66% at Barclays.
It will be hard for any group employing lots of investment bankers to come anywhere near a retail bank’s efficiency. And when it announced results for the first quarter of 2022, Lloyds had edged its cost-to-income ratio back down to 52.3%.
Of course, such efficiency from scale requires ceaseless investment in technology. The bank’s latest strategic plans envision an incremental £4 billion of investment over the next five years.
In 2021, Lloyds realized the return on previous investments by safely migrating 45 million customer records, workloads and models to the Google cloud platform. It also achieved cost savings from decommissioning thousands of legacy applications and services. And it migrated some 120,000 customer accounts onto a pilot of its new bank architecture.
While it continues to pay for past misdeeds, for example at HBOS Reading, Lloyds' new management team, under chief executive Charlie Nunn, knows that with 26 million customers, the bank is heavily dependent on the UK economy.
Its self-proclaimed purpose of helping the UK prosper equates to helping Lloyds prosper. This is not an altruistic organization. It is a bank. Last year, it strove to deal with corporate and small and medium-sized enterprise borrowers struggling to cope with the lingering impacts of the pandemic, while it expanded mortgage lending.
This year, the UK is in the middle of a cost-of-living crisis. While rising rates should be a near-term benefit to that healthy net interest margin, the impact on asset quality from the Bank of England’s response to higher inflation remains to be seen.
On the bank’s first-quarter 2022 earnings call, Nunn said Lloyds is already contacting customers it thinks may be impacted.
He said: “We encourage customers, where affected, to get advice early and talk to us.”
Let’s hope staff are ready for what is coming.