ALEX BRUMMER: Lloyds banks on new frontiers

Past misdeeds continue to haunt Lloyds. Chief executive Antonio Horta-Osorio has rendered it a safe bank, but flushing payment protection insurance (PPI) out of the system in 2019 cost a further £2.5billion.

It also cut bonus payouts for all staff, including Horta-Osorio. One suspects he will get by on £4.7million, a 29 per cent reduction on the year before.

PPI may be fizzling out now that the claims deadline has passed. Final compensation for the fraud at HBOS’s Reading branch is still pending following the publication of last year’s independent report by law professor Sir Ross Cranston. 

It indicated that current management knew a great deal more about the Reading debacle than previously claimed.

The big problem for Lloyds is that in spite of its domination of the historic mortgage market, the money tree has failed to blossom. 

A decade of ultra-low interest rates, together with unexpected competition, has stymied ambition.

An unexpected consequence of ring-fencing rules means that rivals Barclays and HSBC can no longer use domestic deposits to fund wholesale operations.

As a result, they have been pumping funds into the mortgage markets. This is great for house buyers but not for the bottom line.

Lloyds is a proxy for the British economy because of its scale. It may well benefit from the ‘Boris bounce’ in spite of coronavirus and worries about the shape of Britain’s future trade relations with the EU. 

Lloyds and the rest of the financial community no longer have to live with the yo-yo of parliamentary uncertainty.

Horta-Osorio has opened up two new paths to growth. The decision to link up with Schroders on wealth management is proving attractive for middle Britain. 

Joint venture Schroders Personal Wealth saw a 21 per cent rise in new assets over the past year.

The second path is the digital bank. Lloyds’ Single Customer View, which it describes as the largest digital bank in the UK, sounds a good start.

Whether it is a genuine competitor to Natwest’s app-only bank Bo, Monzo and all the other start-ups with the most speedy computing and data analysis is hard to know.

The possibility of a serious erosion of the customer base is the greatest threat to the High Street banks.

After nine-plus traumatic years at Lloyds, it is not surprising there is speculation about Horta-Osorio’s future.

Certainly chairman Lord Blackwell and the board would be remiss if they had not embarked on succession planning.

Free trades

Morgan Stanley is not letting the grass grow under its feet when it comes to the digital economy.

It is offering £10billion, in an all-share deal, for online brokerage house E-Trade. The deal appears to offer Morgan Stanley a stable revenue stream, better returns and some cheaper funding. 

Essentially it replaces more expensive resources raised in the money markets with ‘free’ or ‘endowment’ customer credit.

New York’s investment banks are seeking to normalise by becoming less dependent on trading income. Morgan Stanley has bought into the Swiss model by building up its wealth management. 

Goldman Sachs is trying the same. Both investment banks are also focusing on the broader consumer market by building online banks. 

It is easier doing this in the US than in Britain where Goldman’s online bank Marcus has gathered almost enough deposits to be caught by the UK’s ring fence.

In the US, the new marketing frontier in finance is the abolition of all commission for dealing in stocks and exchange traded funds. Instead, brokers such as E-Trade rely upon customer balances, stock lending to short sellers and other wholesale services to pay their way.

Time for British platforms such as AJ Bell and Hargreaves Lansdown to wake up and smell the coffee.

Flight path

Donald Trump looks to be doing BAE a favour. By putting pressure on European countries to increase defence spending, the void created by the German ban on allies selling arms to Saudi Arabia could be partly closed. 

The sale of 48 Typhoon jets to Saudi may still be on hold but Germany looks ready to buy more Typhoons for its own use.

BAE also anticipates higher sales for Europe’s missile maker MBDA. Other Gulf states are exploring Typhoon purchases. Fears it might all be over for UK’s air-based fighter platform may be overdone.