The chief executive of Lloyds Banking Group has warned that political uncertainty, regulatory costs and a lack of focus on competitiveness in the UK is holding back international investment in the country’s banks.
“There is nervousness at the moment about the UK . . . around the lack of stability that we’ve had,” said Charlie Nunn at the FT’s global banking summit on Tuesday.
Nunn visited US investors the week after former chancellor Kwasi Kwarteng’s disastrous “mini” Budget in September and found the budget had caused a “significant drop off in certainty”. He also heard “concerns about the UK as an investment thesis”.
The Lloyds boss added that divergent economic prospects between the US and the UK — including on productivity growth and balance of trade — would also hamper investment in the medium term.
The UK financial services sector has suffered from an additional longer-term discount, he said, caused by large fines — such as the £790mn in charges Lloyds took last year relating to historical fraud at HBOS, which it owns — and a focus on restructuring and implementing regulation over the past 13 years.
“Capital investments have gone to those things rather than innovating and driving growth,” said Nunn.
However, he added that the emphasis on competitiveness in the Financial Services and Markets bill currently working through the House of Commons was welcome, saying it “hasn’t been the focus of the last decade”.
Nunn said that Lloyds was not going to “take advantage” of the lifting of the bankers’ bonus cap “unlike other financial services companies”. Barclays, which has a substantial investment bank and a large New York-based workforce, and HSBC, which employs most of its staff in Asia, gain more from the removal of the cap.
He unveiled his £4bn growth strategy for Lloyds in February, after years of retrenchment under previous chief executive António Horta-Osório. Nunn said that its targets — including adding £1.5bn to revenues by 2026 — were “very achievable”, even with the darkening economic outlook.
Shares in Lloyds have fallen almost 8 per cent so far this year and they have declined nearly 30 per cent over the past five years.
Nunn also said on Tuesday that Lloyds, which is the UK’s largest mortgage lender, was talking to regulators about measures to support homeowners.
While the majority of Lloyds customers were concerned about the cost of living crisis and challenges it will pose in 2023, Nunn said that only 1 per cent were currently unable to make ends meet.
Strategies discussed with the Financial Conduct Authority include extending terms on home loans to support consumers struggling to keep up, or switching to interest-only mortgages.
While mortgage rates have fallen significantly as the market has stabilised following the “mini”-Budget, borrowers face far higher rates than a year ago.
Lloyds forecasts “a relatively mild recession for most of next year”, he said, with only a 1 per cent fall in gross domestic product, unemployment reaching 5 per cent and interest rates peaking at 4 per cent.
“It is an unusual recession to have employment still strong but have tight labour markets, which means a difficult time for consumers and businesses, but not an extreme recession,” he said.
The crisis among pension funds using so-called liability-driven investment strategies had a “very modest” impact on the banking sector, said Nunn. The volatility was triggered by the “mini”-Budget, which caused turmoil in the gilts market, forcing some pension funds to raise cash urgently.
Lloyds paid a £500mn pension deficit contribution in the third quarter to its own pension schemes, though chief financial officer William Chalmers said in October that this had been pre-planned.
Source: Financial Times