ACCORD CONFERENCEBanking: Our Strategy, Politics and Regulation to 2015

Dominic Morris26 APRIL 2012

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INTRODUCTION

How hard to get the message across? Where do you rank banks vs big pharmaceuticals, oil, junk food, alcohol, estate agents, tobacco industry?

Very few signs of improvement in 2011 (see next slide)

Several banks went backwards

Variance in brands. But Lloyds Banking Group closing the ‘negative gap’ (S 09 -22% W 11 -8%)

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FAVOURABILITY – All MPs

• Nationwide are clear leaders with HSBC and Barclays in second place• Favourability towards Lloyds TSB and LBG have increased, but MPs are now

less favourable towards Halifax

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WHY?

Lending (not)

Bonuses: US attitudes to Capitalism and Scandinavian Puritanism.

Misselling

General public beginning to feel the pain

Characteristics of Balance Sheet Recessions

All banks regarded the same i-banks tarnish retail/commercial (some allowance for mutuals) Need to differentiate

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THE TIDE OF REGULATIONChange, Change, Change…

Source: Lloyds Banking Group data

>80 Consultationsin 2003

300+ Consultationsin 2011

400+ expected in 2012

Run rate c.420 consultations in 2012

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REFORM IS NECESSARY BUT REFORMERS HAVE INCONSISTENT GOALS

Crisis had many causes. But search for a ‘single club’ solution

Tensions between stability and growth agenda Higher capital/liquidity = less lending capacity

Unintended consequences Bail-in + depositor preference = reduction in senior unsecured funding = higher

cost of money market funds = dearer mortgages/loans Ring fencing may increase corporate reliance on foreign banks Solvency II rules could knacker UK annuities market

Inconsistent rules Vickers vs. Volcker

But combination of capital/liquidity, ‘living wills’, governance/ incentive changes, ring-fencing and better micro/macro-prudential regulation will lead to safer banking system

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THE ICB AND AFTERMATH

Higher capital and liquidity

Ring-fencing: the “Big Idea”

Depositor preference

Switching/transparency for competition

No change to Verde

LBG least impacted of major UK banks (though not negligible)

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HOW MUCH DOES IT MATTER? WHAT ARE WE DOING ABOUT IT

Total reform package costs One-off implementations £1-2bn for LBG Ongoing costs + £500m-£1bn p.a. Capital/liquidity holding costs +40-70% = Lower ROE

Running harder to stand still

Making a Difference

Some wins (e.g. FSCS = £500m+ cost avoided for LBG)

But banks ‘will only regain respect when (a) taxpayer stake sold (b) balance sheet recession ends = regain our ‘licence to operate’

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WHAT WILL CHANGE IN POLITICAL LANDSCAPETO 2015?

“It’s (still) the economy, stupid”

Coalition friction 2013

Continued political fragmentation (Con/Lab share of vote 88% 1966, 75% 1979, 65% 2010)

Restructuring of the UK? (Scotland Referendum 2014)

Increased power of Local Government/elected Mayors

Will Labour find its vision (beyond ‘Not the Coalition’)

2015 outcome may be inconclusive

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HOW WILL OUR STRATEGY HELP?Start with what’s wrong

UK retail banking model high cost base

Supported by fat revenues from often complex, opaque products with high margins

Repeated compliance problems/misselling scandals

= Unsustainable - new model needed

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THE NEW MODEL

Low cost, efficient

Deliver with scale (large branch networks; investments in technology)

Multibrand (the importance of Halifax but also guerrilla brands like BM)

Simpler/transparent products

Remove misselling risk/multi-billion £ provisions

Lower margin but sustainable and profitable for long-term

= Happier customers= Repay the taxpayers’ investment

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CONCLUSION

Cost reduction not an end in itself

But an essential foundation for new, ethical and sustainable model

LBG possibly only major bank in UK that can do this

Stable, safe, profitable, responsible bank for industry, individuals, communities by 2015

That’s all folks

Questions?