Lloyds Said to Mull Deeper Cuts to Combat Low Interest Rates

  • Lender may cut more than 9,000 jobs outlined in 2014 strategy
  • Bank could accelerate program or give fresh plan this summer

Lloyds Banking Group Plc is considering deeper cuts, beyond its target to eliminate 9,000 jobs by the end of next year, according to two people with knowledge of the matter.

Britain’s largest mortgage lender could remove more jobs than outlined in the October 2014 plan to help lower expenses, said the people, who asked not to be identified because the details are private. A spokesman for Lloyds declined to comment.

“We expect confirmation that cost-reduction efforts have been brought forward somewhat” when Lloyds reports first-quarter earnings on April 28, Jason Napier and Ivan Jevremovic, analysts at UBS Group AG who have a buy rating on the shares, wrote in a note to clients this month. They estimate the lender will post underlying pretax profit of 1.92 billion pounds ($2.75 billion) in the period, down 7 percent from a year earlier.

Chief Executive Officer Antonio Horta-Osorio, 52, is looking to reduce costs as the Bank of England keeps interest rates at a record low, hurting earnings, amid concerns over slowing economic growth. Banks around the globe from Barclays Plc to Citigroup Inc. are eliminating jobs, jettisoning less profitable assets and cutting costs to boost returns amid whipsawing markets and tighter regulation.

Lloyds fell 0.1 percent to 68.7 pence at 8:45 a.m. in London trading on Friday. The stock has slipped 5.3 percent this year and remains below the 73.6 pence price at which the U.K. government would break even on its 20.5 billion-pound bailout of the lender in the financial crisis.

Lloyds’s progress in removing 1 billion pounds of annual expenses by 2017 is ahead of its expectations after the total number of employees fell 2 percent to 75,306 last year and it removed 373 million pounds of costs.

Even so, the lender had based its strategy on a forecast that the central bank would increase its key interest rate to 2.5 percent by the end of next year. It now expects the central bank to hike rates to that level by 2019, making lending less profitable in the meantime. The rate was unchanged at 0.5 percent on April 14.

Revenue Picture

“Fast forward to today from their October 2014 strategy day and there is softness in revenue relative to the picture Horta-Osorio was painting at the time,” said Ian Gordon, an analyst at Investec Bank Plc with a buy rating on the stock. “They have got scope to move faster. They’ll do more in terms of branch closure rationalization and cost take out.”

The U.K.-focused bank said in February it would take two years longer than planned to hit its cost-to-income ratio target of 45 percent because of low interest rates. The measure of profitability now won’t be reached until 2019, after falling to 49.3 percent last year, the lowest among major British lenders.

“They’re going to have to cut more jobs if they’re going to deliver on their targets,” said Edward Firth, an analyst at Macquarie Group Ltd. in London with a neutral rating on the shares. “Lloyds have got a huge opportunity to address the implications of digital and mobile banking, but they need to fundamentally look at how to redesign their retail bank for the future.”

Strategic Review?

Lloyds could accelerate its job-cutting program and undertake a fresh strategic review this summer before the end of its three-year plan, according to one of the people with knowledge of the matter. The lender, in which the government has a 9.2 percent stake, may want to wait for clarity following the U.K. referendum on European Union membership in June before making any changes. It could increase the number of job cuts and branch closures over the existing planning period, the person added.

“We will get to the end of what we said we would do sooner,” Horta-Osorio told reporters at a meeting in February when the bank reported annual earnings. “When you have market trends, where for example customers go much more digital, or when income isn’t growing, we have to adjust the cost base.”

Lloyds announced 625 job cuts across its British consumer operations and moved to close 21 branches on Thursday as part of its 2014 strategic plan. The bank has now cut about 6,325 jobs out of the planned 9,000 positions.

“There is room to go further on cost,” said Joseph Dickerson, an analyst at Jefferies International Ltd. in London with a buy rating on the shares. “The revenue environment for banks is quite poor at the moment for the industry as a whole. It makes sense to see some more branch cuts out of this bank.”

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