After past mistakes, Lloyds (LSE: LLOY) (NYSE: LYG.US) is now slimming itself down and the bank is rebuilding itself around a simple business model — great news for all stakeholders.
Indeed, Lloyds’ simplification reminds me of the 3-6-3 business model, an unofficial rule of banking, introduced in the 1950s. Simply put, this rule describes how bankers would give 3% interest on depositors’ accounts, lend the depositors money at 6% interest and then be playing golf at 3pm.
Of course, in today’s world it’s not possible to operate a bank using the exact 3-6-3 business model, but Lloyds is trying very hard to go back to basics.
Going on a diet
Antonio Horta-Osorio, Lloyds’ Chief Executive has clearly laid out his vision for the bank’s future. Horta-Osorio and his management team is looking to transform Lloyds into a; “simple, low risk, UK focused retail and commercial banking business”.
And the bank’s transformation is already well underway. Back in November, Lloyds agreed to sell its asset management business Scottish Widows to Aberdeen Asset Management. The sale of Scottish Widows followed agreements to sell Heidelberger Leben and Lloyds’ stake in Sainsbury’s Bank. The group is on track to reduce its portfolio of businesses by approximately £10bn during 2014.
Lloyds has now exited, or announced the exit from over 20 countries so far, meeting the bank’s target to be operating within 10 countries or fewer by the end of 2014.
Reducing risk
A return to traditional banking is reducing Lloyds’ exposure to risky assets. Specifically, at the end of March Lloyds reported an equity tier 1 ratio (financial cushion) of 10.7%, up from 10.3% reported at the end of 2013.
What’s more, at the end of 2013 Lloyds revealed that the group had reduced the total value of risk weighted assets on the balance sheet to £263.9bn, down from £310.3bn reported during 2012.
Additionally, over the same period, total credit risk exposure also fell to £724.9bn at the end of 2013, down from £759bn.
Should you buy in?
These plans to make Lloyds a simple, low-risk, UK-focused retail and commercial banking business should support the bank’s earnings growth. An improving balance sheet also removes much risk and supports Lloyds’ commitment to start paying dividends again this year.
