An Analysis of Lloyds Current Strategic Position - Case Study Example

An Analysis of Lloyds TSB’s Current Strategic Position and how Lloyds TSB Will Develop These Strategies in the Future”. Table of Contents Table of Contents 2 Introduction 3 Analysis 3 Macro Economy 3 PESTEL 3 Porter’s Five Forces Analysis 5 Current Position 6 Suggestions 7 Conclusion 8 Works Cited 9 Introduction Lloyds Banking Group plc is a financial services group based in UK. It was initially known as Lloyds TSB Group plc and covers 40 countries in the world. However, its primary market is UK and it operates in three verticals namely, retail banking, wholesale and international banking and insurance and investments. The Lloyds Banking Group plc acquired the Halifax Bank of Scotland plc or the HBOS on January 16th this year (Company Profile par.1) The subprime crisis which started in the US had its effect on those countries whose financial companies were participating in the US based risky financial instruments.UK was one of those countries and approximately around November 2007 the banking sector saw the unfurling of a major crisis (Caine). $323 billion was the amount of total assets write-down and credit loss in the world’s top 100 banks till May 2008. Amongst these, UK banks were also present; HBOS had a loss of $5.9 billion while RBS or Royal bank of Scotland lost $15.2 billion (Onaran). Analysis Macro Economy Due to the subprime and credit crisis towards the end of 2008 UK went into recession and since then the crisis has deepened. This is evident from the fact that the UGK GDP has declined further by 1.9% in the period between January-March 2009. This has also been the sharpest decline since 1979. It is being predicted that the fall in GDP would be even more than 3.5%, which was the common estimation among experts last year. The IMF has also predicted that the UK economy would decline by 4.1% in 2009 (Monaghan par. 1, 3, 5, 13). But in comparison to other EU members the UK economy is in a slightly better condition. Yet public finances will be in a very bad condition in comparison to its EU member states. Also, the country’s government deficit is predicted to be amongst the worst in EU for the next year (Giles, par. 1, 2, 10). Macro economic forecasts by different agencies have also predicted a depressing picture for the economy in the near future. GDP growth is predicted to be less than 0.5% in 2010 while the Retail Price Index inflation is going to be between 2% to 2.5%. Consumer Price Index inflation on the other hand is predicted to be at 1.5%. Current account for 2010 would be at least -£26 billion by April (Forecasts for the UK economy 12-13). PESTEL PESTEL analysis can be applied to investigate the different factors and conditions prevailing in UK which would have extensive effects on Lloyds TSB. Political Factor UK is a parliamentary monarchy, it has no written constitution and the legal system is based upon common law and statutes. Head of the state is Queen Elizabeth II. At the helm of the national government is the prime minister who is supported by the House of Commons and is appointed by the Queen. Some of the important political parties are the Labour party, the Conservative party, the party of the liberal democrats, Social Democratic and Labour Party, Democratic Unionist Party and others. The current Prime Minister, Gordon Brown, belongs to the Labour party. UK has followed a stable democratic election process for many years and the next election will be held by 3rd June 2010 (Political Structure, par. 2, 3, 7, 8, 9). There are separate bodies for the regulation of the financial sector in the country. The FSA or the Financial Services Authority regulates the financial services sector in UK. It is an independent organisation which has been bestowed with statutory powers through the Financial Services and Markets Act 2000.The FSA board is appointed by the country’s treasury and this board sets the broad policy for the FSA. The FSA is accountable to the nation’s parliament through the Ministers of the treasury (Who we are). The basic aims of the FSA are promotion of financial markets which are orderly, efficient and fair so that retail customers get a fair deal. The FSA applies its powers to enforce its statutory goals (What we do). Economic Factors The subprime and credit crisis emanating from the US has had serious bad effects on the UK economy and especially on its banks. As mentioned earlier, almost $323 billion was the total credit loss and asset write-down for the top banks in the world. HBOS, Northern Rock, RBS of UK have all suffered considerable losses over the last few years due to their exposure to the toxic assets. Moreover there is the issue of monoline insurers who are financial entities who guarantee bank lending. TTheir valuations have also come down drastically due to the losses they have suffered from the mortgage crisis. Some portions of the UK bank’s business is insured by these monoline insurers who themselves have become financially weak. Therefore to cover their own risks the UK banks are making extra provision in their balance sheets and that is again creating pressure on them. The banking industry has started facing losses since the beginning of 2008. This fall in performance has been punished by the stock market also. On average, the top five UK banks’ stock market value declined by 25% between July 2007 and March 2008. Due to the financial tension in the economic and banking environment the Bank of England tried to intervene and inject liquidity, by cutting the base interest rate by 25 basis points for three consecutive times. In April 2008, the Central Bank announced a support plan for the banks through which they could swap their toxic securities against government treasury notes to help them in refinancing. In the mean time the real economy was hit in a massive way as the GDP growth rate came down and UK entered recession towards the end of 2008. There have been massive job losses and simultaneous meltdown of the real estate market. Supply and demand have slowed down in the economy (Sabuco, pp. 22-31). Social Factors This kind of economic slowdown and gloom has ill effects on the psyche of the populace which is already bogged down by pressure from job losses, unavailability of credit and predictions of even slower growth of the economy in the future. Technological Factors In this era of technological prowess the UK banks can look towards leveraging the power of the internet to expand their business to far flung areas without opening brick and mortar branches, thus creating opportunities for growth while keeping capital expenditure within control. Environmental Factors This factor does not directly apply to the subject of the report and hence is not discussed. Legal Factors The FSA and the Bank of England have been bestowed with the job of regulating the financial and banking sectors of the country. The Bank of England is UK’s central bank and it became an independent entity in the year 1997. Its primary focus and objective is to ensure financial stability in the economy through prudent monetary and fiscal policies. It also performs the very important duty of fixing the economy’s base interest rate. This decision regarding the interest rate is taken by the Monetary Policy Committee of the bank (About the bank pp.1-3). The FSA (Financial Services Authority) is an independent body which has received statutory powers by an act of the Parliament and performs the job of regulating financial institutions in the country (Who we are; What we do). Porter’s Five Forces Analysis Threat of Entry The threat of entry of new banks is low because at this point of time (due to the economic conditions), not many financial institutions would go for fresh capital expenditure or enter a new market. Power of Suppliers Due to the heavy losses faced by the UK banks, the subprime crisis, and the continued economic downturn the banks have become weaker. Moreover the UK government’s scheme of asset swapping and asset protection scheme, in which many banks have participated has made them answerable to the public (Lloyds Banking Group, sec1). Power of Buyers Banks are not in a financially strong position and moreover the economic outlook is also subdued. In this kind of scenario banks would be more than obliged to service the customers or probable customers and would take additional measures to reach out to them and gain them as customers. Competitive Rivalry There are various banks of high value in UK. But amongst them Lloyds alone has been able to get through the subprime crisis period in a relatively better financial position. It even took over HBOS in January this year. Though rivalry would be high yet Lloyds Bank is in a comparatively better position (Banking crisis, sec. 1, 2, 3, 4.). Threat of Substitutes Though banks do not have substitutes yet there are financial institutions which offer some of the services provided by a bank. Moreover, the banks are vying for the same capital which these financial institutions are vying for. The banks want more deposits. This could be hindered if the customers put money in other financial institutions or simply due to the customer’s lack of funds. Current Position Current Position of the Organisation in Context of its Proactive and Reactive Measures As of the first financial quarter of 2009 Lloyds bank has shown good performance in terms of revenue in spite of the overall economic gloom. This has happened due to growth in wholesale banking, conducive interest and currency rates, better volumes of transaction in the equity market and also better and stronger derivative transactions. The broader margin for the group has improved owing to better margin from assets. But on the other hand deposit margins have been low due to the decreasing base rate and the rising cost of funding. In the first quarter of 2009 the retail side of the bank has seen an addition of 500000 new accounts. It has also increased its market share in terms of net new mortgage lending over the same period. While the unsecured balances of lending has been flat overall, revenue from retail banking has come down a tad in comparison to the first quarter of 2008. Life insurance and pension sectors of the business have come down by 22% in comparison to the first quarter of 2008. This is due to the overall market conditions prevailing in the investment, insurance and pension products vertical. But in spite of these the bank has put in a considerably strong cost performance. Lloyds TSB as a group aims to gain cost synergies in excess of £ n1.5 billion per year before the close of 2011. The company has initiated the process to take part in the UK government’s Asset Protection Scheme which would considerably strengthen its finances and bring down the proportion of toxic or risky assets. £ 194 billion is the amount by which the bank thinks its risk weighted assets would come down due to its participation in the government scheme. It has a stronger liquidity scenario and has successfully stretched its wholesale liability’s maturity period and profile. It has also taken the prudent decision of participating in the Government’s Asset Protection Scheme, for which discussions are going on with the HM Treasury. Once the European Commission and the shareholders give permission and other regulatory hurdles are cleared, the bank would be able to participate in the scheme. But again the overall economic slowdown, high unemployment levels, decreased cash flow from the business entities, falling valuation of the realty sector have contributed to a significant rise in impairment levels in its lending portfolio. As the bank recently acquired HBOS, it is worried about HBOS’s exposure to toxic real estate and subprime assets. This is going to have an adverse effect on the bank (Lloyds Banking Group. Sec. 1, 2, 3, 4, 5, 6, 7). Suggestions Suggestion for the Bank’s Development in Future The worldwide economic condition is bleak and the predictions of future economic growth are equally dismal. Yet, even in this gloomy scenario, Asia has performed considerably better in terms of economic growth in this period. Two countries particularly, China and India have been able to sustain higher single digit growth levels in spite of this slowdown in the world economy. Recently it has been predicted that the Chinese economy would grow by 7% in the 2nd quarter. This is based on sound fundamentals as it has been reported that investment in the production and construction side of the economy would see an increase of 27.6%. Moreover the Chinese government is spending $586 billion as stimulus to the economy. The local banks there have been doing good business which is evident from the fact that they have disbursed $673 billion as fresh loan in the first financial quarter this year (China think tank. Par. 1, 3, 4, 13.). The Indian Economy is predicted to grow at 7% in the present fiscal period while it grew at 9% levels previously. Though 7% growth signifies a slight slowdown from previous levels, yet this cannot be termed minor growth (Antony, par.1). In fact in one of its reports based on a detailed analysis a reputed business consulting firm has predicted that India and China along with Russia and Brazil would emerge as economies bigger than the present Western economic giants within a period of the next forty years. Indian economy would surpass the economies of Italy, France, Germany and Japan approximately by the years 2015, 2020, 2025 and 2033 respectively. China would show even faster rate of growth than India and it would surpass the economies of Germany, Japan and USA roughly by the years 2008, 2015 and 2042 respectively (Dreaming with Brics. Sec. 2, 3.). These two large countries provide huge growth opportunity for the future and this is the right time for Lloyds bank to enter these markets to leverage them in the future. This would also ensure that the relative growth from these two markets would balance out the slowdown in its operations in the Western part of the world. Conclusion Lloyds Bank, though doing comparatively better than its peers, has still been hit by the encompassing economic slowdown and credit crisis. Some of its operations are doing relatively better than others. It has tried hard to maintain a good liquidity and cost synergy position. The company has seen some success in context of revenue growth but in order to broaden its scope of future growth it would do well to expand into markets like China and India which show great potential, even in midst of the worldwide economic downturn. Works Cited Company Profile for Lloyds Banking Group PLC. Reuters. May 2009. 11 May 2009. < http://uk.reuters.com/business/quotes/companyProfile?symbol=LLOY.L>. Caine, Naomi. Greedy Bankers and The Banking Crisis. MSN MONEY. MSN UK. November 2007. 11 May 2009 . Onaran, Yalman. Subprime Bank Losses Top $323 Billion With Hbos, Lloyds: Table. Bloomberg. May 2008. 11 May 2009 < http://www.bloomberg.com/apps/news?pid=20601208&sid=af5QKJvhUzKY&refer=finance>. Monaghan, Angela. UK economy slumped by 1.9pc in first three months of 2009 as recession deepens. 24 April 2009. Telegraph. 11 May 2009. . Giles, Chris. Brussels sees UK economy contracting 3.8% . 4 May 2009. Financial Times. 11May 2009. . Forecasts for the UK economy. April 2009. HM Treasury. 11May 2009. < http://www.hm-treasury.gov.uk/d/200904forecomp.pdf>. Political structure. 28 April 2009. Economist Intelligence Unit. 11May 2009. < http://www.economist.com/countries/Britain/profile.cfm?folder=Profile-Political%20Structure>. Who we are. August 2007. Financial Services Authority. 11May 2009. < http://www.fsa.gov.uk/Pages/About/Who/index.shtml>. What we do. August 2007. Financial Services Authority. 11May 2009. < http://www.fsa.gov.uk/Pages/About/What/index.shtml>. Sabuco, Philippe. July 2008. British Banks and The Subprime Crisis. Economic Research BNP Paribas. 11May 2009. . About the Bank. Bank of England. < http://www.bankofengland.co.uk/about/ >. Lloyds Banking Group – Interim Management Statement. May 7 2009. 11May 2009. . Banking Crisis: Dealing With the Failure Of The UK Banks – Treasury. 29 April 2009. UK Parliament. 11May 2009. “China think tank: Economy to grow 7 pct in 2Q,4” May 2009. BusinessWeek. 11May 2009. . Antony, Anto. “GDP Growth in India Falls to 7.1%. 9 February 2009.” Businessweek. 11May 2009. . Dreaming With Brics: The Path to 2050. October 2003. Goldman Sachs. 11May 2009. . Read More