Why a lender promising to cut its lending makes sense – and why the ECB can’t do much about it
IT IS not often these days that you hear a high street bank executive admit that his plan is to lend less to those well-loved aspirational families. And yet that is exactly what António Horta-Osório told analysts yesterday on a call to discuss Lloyds’ first quarter results.
The aim, he said, is to slash the bank’s mortgage-lending market share from 28 per cent to 25 per cent, while increasing its savings market share from 23 to 25 per cent, so that the latter fully funds the former.
This is highly confusing for bank-bashers. On the one hand, they might say that Lloyds’ overbearing market share ought to be decried for being anti-competitive. And yet, on the other hand, it’s a clear case of families being let down by a stingy bank refusing to help them buy their dream house. And yet, and yet, on the other hand, it’s thoroughly irresponsible for a bank to use so much debt to fund so much property lending. And so on.
But it is also a curiosity for analysts. Retail credit quality is going up: Lloyds’ impairment costs have fallen by almost a third this year to £1.7bn. And Espírito Santo’s Shailesh Raikundlia estimated that the plan will slash three per cent off pre-tax profits for the core bank.
Nonetheless, Raikundlia calls it the “right strategy” in the long-run. The problem is that the post-crisis world hasn’t just made a lot of sinister-sounding financial engineering unprofitable. It has also dramatically cut the margins on the vanilla property lending at the heart of the bubble.
One of the key reasons for this is that banks’ cost of funding – obviously a key input of their lending costs – is going up, probably permanently. This is partly because markets underestimated their riskiness for far too long and lent to them too cheaply. It is also because of regulators’ laudable efforts to abolish the “too-big-to-fail” problem by making sure bank creditors know that, next time, they will have to absorb a large part of the losses if a lender fails. But the trend is also being unnecessarily exacerbated by regulatory confusion and states’ insistence that lenders load up on public debt, tying their fates ever closer to Europe’s volatile crisis.
The European Central Bank has tried to mitigate the problem with its huge cash injection in the form of €1 trillion in three-year loans to banks. But we also learned yesterday that while Lloyds has taken £11.4bn of this cheap funding, it has, for the time being, parked most of it in its bank account at the ECB, and only plans to bring it into play gradually.
The problem is that banks know the ECB has to turn off the tap at some point. And when it does, lenders will have to survive on their own in a very different world. It would take a truly reckless banker not to cut lending.
juliet.samuel@cityam.com
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