What Management Would Prefer You Didn’t Know About Lloyds Banking Group PLC


It would be interesting to know if the anger we express to customer service officers at the banks is due to genuinely poor service, or as a result of our own general pent-up aggression. Whichever it is, we know that call centre workers at the banks suffer their fair share of abuse. As it turns out, employees at Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) are some of the worst hit.

The latest publicly available data on the banks show that, among those surveyed, 45% viewed their experience with Lloyds as “great”, around 40% said it was “ok”, and then about 15% said the experience was “poor”. You can bet those “poor” conversations had a few expletives. Lloyds actually ranked in the bottom five of UK banks surveyed, according to The Independent.

The bottom line is that the banks are finding fewer and fewer reasons to engage with the public at a ‘face-to-face’ level. Indeed, the digital revolution has highlighted just how costly and painful it is for a bank to have a public face — think of a teenager with acne.

There are though a few interrelated things going on here that I think Lloyds management would prefer investors didn’t know about.

Just do bit at a time, then no one will notice

Three years ago, Lloyds announced a grand new strategic plan. It involved 15,000 job cuts. That was on top of the 28,000 chopped out of the bank following the purchase of HBOS in 2008. Now the media are reporting that the bank has plans to cut about 10 per cent of its workforce next week.

What’s going on?

I’ll tell you what’s going. The face of banking is changing. According to the Financial Times, there’s been a sharp drop in the number of people using Lloyds branches and call centres. More and more customers are using their mobile devices to do basic transactions. There must be more to it, though. Well as it turns out I think there is. You see Lloyds employs roughly 88,000 staff and has around 2,000 branches located around the UK. By sacking 10% of its workforce (because of “branch closures”) — assuming at least four people work in each branch — you’d effectively be wiping out the bank’s entire branch network. This Fool suspects the bank is simply downsizing further in order to survive what’s become a brutal environment for the banks. The digital revolution has just provided Lloyds with a convenient escape hatch.

Desperate times calls for desperate measures

As if lofty overheads weren’t enough, the bank’s also facing challenges to its income. Here’s the problem: the average house costs five times the average person’s annual income. Prices aren’t getting lower in a hurry, either. On the supply side, the rate of new-home construction is the lowest since the 1920s, while extremely ‘easy’ monetary policy by the Bank of England, and government subsidies, are only fuelling demand.

Lloyd’s exposure to the new homes market is also sizeable — it funds around a third of all lending.

All of this has obviously worried the bank. It knows it needs a new generation of home owners! In response, Lloyds chief executive António Horta-Osório has called for at least 60,000 homes to be built to help tackle the current level of supply. The bank’s also announced it will set up a £50 million equity fund for smaller house builders. Lloyds is literally trying to raise the roof on the this market to prevent its bottom line from dropping through the floor.

And finally, a couple of short-term hurdles…

There are also a couple of things in the very short term that Lloyds investors should be aware of. Next week the bank could finally receive regulatory approval to restart its dividend payments policy. It was cut off during the crisis. The bank’s also staring down the barrel of its stress test results. Those numbers will come in next month.

They may be paid a lot but I don’t envy the board members of this bank.

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David Taylor has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.