Thursday, 11 June 2009

Lloyds And The "Death Of A Thousand Cuts"

Lloyds Banking Group has appeared again with the latest announcement of job cuts. The press and unions describe the latter as the "death of a thousand cuts", but is this fair?

Another 1,660 job losses were recently announced due to the closure of all the Cheltenham & Gloucester (C&G) Building Society's 164 branches now owned by Lloyds Banking Group (LBG). About 930 will go from C&G itself, with the rest from the Black Horse Personal Loan Division. This is bad news, but there needs to be a sense of perspective on the situation. In particular, three things spring to mind.

Firstly, the takeover of HBOS was conceived and executed in haste and (as Lloyds admitted) without proper due diligence. Can senior Lloyds management be entirely blamed for this, or was there considerable government pressure to step in to avoid another Northern Rock scenario?

The due diligence is happening now as senior management try to work out what to do with the myriad of brands that now form LBG. Simply put, they have too many brands doing similar things. Inevitably, cuts have to be made, especially if LBG are to pay off the taxpayer funds that have been poured in. The question is, how many of these jobs can go due to "natural wastage".

Secondly, there have been questions over the new market position that this gives LBG. According to The Times, LBG has a number of brands in the home loans market following their takeover of HBOS. These include Halifax, Bank of Scotland, Intelligent Finance, Lloyds and Scottish Widows Bank. In the buy-to-let market, LBG has Bank of Scotland, C&G and BM Solutions.

The new LBG controls 30 per cent of the mortgage market, and will certainly come under pressure to shrink (especially as it repays government funding). However, if it reduces its number of brands, it will be more difficult for politicians to press for a reduction in LBG's dominance. Before the recession, such a merger would never have been allowed. In short, LBG need to shed something to reduce the potential for accusations of government funding backing a dominant position. Why keep costly C&G branches open when there may be HBOS and/or Lloyds TSB branches in the same areas? Ultimately, it would be the taxpayer footing the bill for these.

Thirdly, the bad news is almost certainly not over. As management delve deeper into the new organisation, we should expect more cuts. How far these will go, one cannot say.

We don't know if LBG considered selling C&G - one hopes they did - in the hope that a buyer who wanted an "in" to the UK market could be found. However, such buyers at the moment are few and far between.

The effects of the Lloyds/HBOS takeover will take many years to truly come through, not just in terms of headcount, but also in terms of market position, products and systems. This is only the beginning.