Qualiport

[ February 21, 2000 ]

Lloyds TSB -- Still Number One?

By Maynard Paton (TMFMayn)

Carburton Street, London -- As mentioned last week, I promised to review the recent 1999 results of Lloyds TSB (LSE: LLOY), and contrast their performance to some of the other banks that have also reported their full 1999 figures. As I found out over the weekend, reflecting on a bank's financial accomplishments is no easy task -- anyone who has a read the second half of any bank's annual report should know what I mean.

I've compared Lloyds TSB to the Halifax (LSE: HFX), Abbey National (LSE: ANL) and the Woolwich (LSE: WWH). Just to keep things simple, I've looked at just three important financial ratios. But there are many other calculations that can be considered. Not only has the number-crunching been contemplated, I've also looked at the remarks from each bank concerning their approach to the provision of online services. Mindful of the launch of various Internet services by just about every Lloyds TSB rival last week, I'm keen to investigate how Lloyds TSB is addressing the issue. The future of banking, it appears, will be in cyberspace.

The Financials

Banks make a significant proportion of their profit from the different rates of interest used when borrowing money from the public and lending it back. That is, the money you put on deposit (money that the bank is effectively borrowing) receives a lower rate of interest from a bank than the rate of interest the bank can receive from lending it back to you (for example, in the form of a loan or mortgage). The greater the difference between these two interest rates, the difference being called the "net interest margin", the better.

Here's how Lloyds TSB squares up to the three other High Street favourites in this respect.

             Lloyds TSB  Abbey   Halifax Woolwich
                        National

Net Interest 
Income (£m)   4,801      2,661     2,454     664

Net Interest
Income / Total 60.1       71.0      74.3    68.0
Income (%)

Net Interest
Margin (%)      3.86       1.75      1.92    1.98

The difference is stunning, and I did have to double-check the net interest margin figures, just in case! Lloyds TSB does appear to be head and shoulders above its peer group, and the figures for 1998 tell a similar story. Lloyds TSB generates the largest amount of net interest income of the four banks, and has the most efficient net margin interest operation. Not only that, but the other three banks are dependant on their inferior money management skills to produce, in relation to Lloyds, more of their total income.

The next check is the cost:income -- or efficiency -- ratio. Put simply, this is the banking equivalent of the more familiar operating margin. Here, the lower the figure the better.

                  Lloyds TSB  Abbey   Halifax Woolwich
                             National

Total Costs (£m)    7,980    3,756     3,304    411

Total Income (£m)   3,373    1,594     1,405    976

Cost to Income
Efficiency Ratio (%)  42.3      42.4      42.4   42.1

All four are equal. It must be noted that all the banks have slightly different method of accounting presentation, and with a myriad of "exceptional" charges, the cost to income picture does get clouded. But Lloyds TSB does stand out from the pack with its "cost commentary".

The Qualiport bank remarks: "We have now begun a major new efficiency programme, and the cost reductions from this programme, together with the expected revenue growth, are such that by 2002 we expect that the Group's efficiency ratio will be below 35%, and we forecast further progress thereafter".

Given the successful reputation of reducing expenditure after the TSB acquisition, this gives me a positive feeling towards the Qualiport holding Lloyds TSB shares. The bold words, stating an irrefutable target, contrast starkly to the rather bland offerings from the three rivals. For instance, the Halifax are content with no cost savings this year, to instead re-apply any savings into new technological ventures (more on which later). Although having said that, the Halifax did indicate this time last year that costs would remain static, although they actually declined 3% during 1999.

And the Abbey National, on the other hand, appear to have reneged on an cost-cutting target set eighteen months ago. After promising to increase revenue 2 to 3 times faster than expenditure, their 1999 cost to income ratio actually rose, as the Abbey didn't wish to "constrain" the business by not increasing investment on their new online activities and "process efficiencies".

And finally, Lloyds TSB is the clear winner on the key banking investment ratio, return on average shareholders' equity.

                  Lloyds TSB  Abbey   Halifax Woolwich
                             National
Return on Average
Equity (%)           25.7     19.7     14.8     20.3*

(* unadjusted for goodwill written off)

Away from the financials, though, and onto future developments, where Lloyds TSB does appear to lag.

Internet Banking

The future revolves around technological innovation, with the Woolwich spelling out its banking vision of tomorrow: "The year 2000 will be a watershed year for banking. 1999 saw the emergence of substantial new entrants using direct channels met by the vigorous response from the existing participants, and over the next two years there will be profound changes to the way we do banking. This process will result in winners and losers, depending on how banks deal with the new technologies".

If this is the case, and the "dealing with new technologies" is proportional to the prominence of IT-related comments in the results press releases, then Lloyds TSB could be a loser.

A quick review of the four banks' IT comments, starting with the Woolwich. The bank's strategy revolves around technology being "customer-centric". Internet banking via computers, digital TV and mobile phones through WAP technology, are all key to the Woolwich future. The group also highlights its middleware capabilities, effectively allowing it to integrate several product databases into one to create increased cross-selling opportunities. Within the Woolwich press release, the above remarks concerning IT, including name-dropping the likes of Intel (NASDAQ: INTC), Microsoft (Nasdaq: MSFT), and Vodafone AirTouch (LSE: VOD), all come before such core operational topics as "UK Lending" and "Credit Quality".

Just as enthusiastic about IT is Abbey National. A "self-contained virtual proposition", or an Internet bank to you and me, called cahoot.com, is to be launched this summer. It will use all the same distribution channels as the Woolwich: the Internet, digital television, and mobile phones.

But the Halifax wins the "make the most noise about IT" competition hands down. The bank announced, in the days preceding its results last Friday, an online insurance brokerage and various interactive banking services. Not only the new applications, but high profile "e-ntrepreneurs" have been also been roped into the cyber-ventures. The Halifax is unusual in the fact that it gives definite financial expectations about its prospective Internet undertakings. A 15% post-tax return is anticipated within three years from the £1.5bn capital deployed to exploit the online endeavours.

The Halifax comments on its strategy "We are devoted to demonstrating how superior management in the performance of this business whilst having the courage and vision to invest heavily in its future, because in a world of intensifying competition and unprecedented technological advances, nothing less will do."

Now turn to Lloyds TSB. "Alternative" distribution channels are deep within the Lloyds TSB results release, just after the confirmation that all of the former TSB branches have been re-branded. Indeed, Lloyds initially refers to its telephone banking operation, PhoneBank, prior to any cyberspace developments. To its credit, Lloyds does mention the launch this summer of a stand-alone pan-European Internet bank, to be followed by a similar UK operation later in the year. Overall, IT is very understated at Lloyds TSB.

Hmmm... there are two ways of looking at this technological situation. Firstly, there is the assumption that Lloyds is going to be left behind to become a banking dinosaur, eventually annihilated by its "first-moving" and swifter opponents. Or on the other hand, you could perhaps consider it a coincidence that it is the poorer performing banks, on a financial operating basis, that are just better at producing publicity over the future of e-banking.

My initial thoughts at this point lean towards the latter. Having perused the accounts for the four banks, Lloyds is still the financial top dog. Its approach to a definite cost to income ratio target is admirable. But will the management keep their heads in the accounts, so as to miss the start of any technological revolution?

The question really to be asked is: will it really matter if the Lloyds TSB online ventures arrive up to a year later than any competing systems? That leads us onto all sorts of topics, such as bank account inertia, the "success" of that other revolution in the sector, telephone banking, and whether investors should take publicity over future e-commerce plans as a priority over historical financial performances.

For now, I'll leave you to ponder over those. Let us know your thoughts, on Lloyds TSB, its financials and all the online banking initiatives, over on the Qualiport message board.

Related Links
• Halifax -- eBygum
• Halifax Calls For Extra Help

Note
The Qualiport was launched on December 19th 1997 with an initial investment of £4040.63, all in Rentokil Initial. Further cash was added as holdings in Emap, Marks & Spencer and Unilever were bought during 1998. The vagaries of the value per share accounting method caused percentage return calculations for calendar 1998 to be somewhat distorted. To avoid confusion and somewhat misleading figures, the Qualiport's returns are being measured from 1/1/99, at which point the total portfolio value, including cash, stood at £16,809.60. An additional £2000 cash is added to the portfolio on April 1st and October 1st each year. The total cash investment in the portfolio to date has been £20,184.62. To access the Qualiport's total trade history, click here.