Memorandum submitted by Lloyds TSB
1. EXECUTIVE
SUMMARY
— Lloyds TSB lending to SMEs has grown
by 18% this year.
— SME Charter launched to cement Lloyds
TSB's commitment to SMEs during the economic downturn.
— Relationship banking at the heart
of Lloyds TSB's strategy.
— Experienced relationship managers
committed to providing Lloyds TSB's SME customers with expertise
and support.
— Lloyds TSB remains well funded and
secure and is committed to serving its customers through the difficult
times ahead.
2. LLOYDS TSB
GROUP
2.1 Lloyds TSB is one of the UK's leading
providers of financial services. It is currently the only UK Bank
to hold an "Aaa" (triple A) Investment Grade Rating
from Moody's which reflects its prudent risk strategy. In addition,
Global Finance Magazine rated Lloyds TSB as the sixth safest bank
in the world based on its creditworthiness, making it the highest
ranking British bank. Lloyds TSB has also been voted Britain's
most trusted bank for eight years in the Readers Digest poll.
2.2 Lloyds TSB Commercial serves business
customers, across Great Britain, from one-person start-ups to
larger, established enterprises with a turnover of up to £15
million. It serves 250,000 charity and "not for profit"
organisations and has over 650,000 small and medium sized (SME)
business customers throughout Britain. SMEs are as important to
Lloyds TSB as they are to the wider economy. Over the last 12
months, Lloyds TSB has opened accounts for approximately 100,000
new start-up businesses and has been recognised for its support
of SMEs through the following awards:
— Finance directors have selected the
Commercial and Corporate Banking business as Bank of the Year
for the past four years in the Real FD/CBI FDs' Excellence Awards.
— The National Association of Commercial
Finance Brokers' recently chose Lloyds TSB as the Commercial Bank
of the Year and Commercial Mortgage Lender of the Year.
3. PROPOSED ACQUISITION
OF HBOS
3.1 The Committee will be aware that Lloyds
TSB has announced that it intends to acquire HBOS. The transaction
is subject to regulatory and shareholder clearance, however, we
anticipate that the proposed acquisition will complete in January
2009. Lloyds TSB is at an early stage in working out precisely
how it will bring the two organisations together, however, Lloyds
TSB believes that the combination of Lloyds TSB and HBOS will
provide an enhanced ability to support and serve consumers and
small businesses.
4. CURRENT ISSUES
FACING SMES
4.1 Small businesses are facing a tough
time at the moment. Consumer and business confidence has declined
and this is directly impacting demand for their products and their
income. At the same time, SME's supply costs are increasing.
4.2 The situation is being exacerbated by
SME's suppliers who are in turn reducing the amount of credit
that they're providing and larger businesses who are extending
payment terms so that they take longer to pay. All these factors
are squeezing cashflow which is being put under pressure. Lloyds
TSB welcomes the Government initiative to ensure public sector
invoices are settled within 10 days.
4.3 In research recently commission by Lloyds
TSB, SMEs said that falling income (profit margins) and cashflow
were the top two threats that they faced. Access to credit was
the third largest concern for all SMEs. However, for customers
of Lloyds TSB, access to finance fell to 6th place after interest
rates, road fuel prices and energy costs. This is evidence of
the Bank's commitment to SMEs and reflects the 18% growth made
in lending this year.
4.4 The economic difficulties facing SMEs
have coincided with the current lack of confidence in the financial
markets, where both wholesale funding and capital have become
increasingly scarce resources. Some banks have experienced difficulties
and still continue to face difficulty in accessing liquidity as
a result of the global credit crunch. In the wholesale markets
the availability of term funds (ie funding with maturities of
over two years) has fallen dramatically. Funding with shorter
maturities is not available in sufficient volume to substitute
the secured funding that was available before the credit crunch
and is very expensive: the three month London Interbank Offered
Rate (LIBOR) is still some 1.3% above the Bank Base Rate. Lloyds
TSB continues to have access to the markets because of its triple
A rating. Furthermore, the worsening economic outlook has also
prompted the regulator to raise the amount of capital banks are
required to hold and to strengthen their capital ratios. This
adds significantly to the cost of providing loans.
4.5 This combination of funding and capital
issues has led to a reduction in the number of lending institutions
available to either businesses or individuals who use personal
finance to help support their business. Building societies and
smaller banks have scaled back their commercial aspirations. Many
specialist lenders are no longer taking on new business and overseas
banks have also retreated from the UK. This has resulted in a
substantial reduction in the number of commercial mortgage providers
in the UK. Also, small business owners often look to their home
as a source of raising capital for their business, however, falling
house prices has made this even more difficult.
4.6 There is, therefore, a mismatch between
supply and demand for lending to SMEs. Apart from the reduction
in lenders, those businesses that need to borrow may well be of
a lower credit quality than previously had been the case, due
to the recessionary pressures they face. In particular, falling
demand means lower sales and that puts direct pressure on overdraft
limits. If businesses need to increase their borrowing, they are
often doing so from a weaker asset position (falling values on
fixed assets, both property and machinery) and a poorer trading
statement.
4.7 Media speculation about the lack of
available lending to small businesses, despite data to the contrary,
means that some businesses believe they will not be able to increase
their borrowings. The media coverage may be dissuading them from
approaching their bank. The main challenge now facing SMEs is
to adjust business plans in the face of a more difficult economic
environment and to talk to their bank.
5. RELATIONSHIP
BANKING
5.1 Relationship banking is at the heart
of Lloyds TSB's strategy. That means working with and understanding
the financial and non-financial needs of its customers, building
a relationship with them to help them grow and prosper. Lloyds
TSB Commercial's mission is to be valued by customers, worthy
of their loyalty, and trusted partners for the lifetime of their
business. In support of this mission, Lloyds TSB takes pride in
a "through the economic cycle" approach to credit policy,
which means stability, thereby helping and working with customers
through the good times and the bad.
5.2 Lloyds TSB is in a strong, safe and
secure financial position. It is well funded and has a prudent
lending profile—favouring a long-term approach. One test
of Lloyds TSB's relationship model is whether it is able to quickly
respond to the short term borrowing needs of its business customers.
Because of the strength of its financial position, Lloyds TSB
has been able to continue lending and SME customers are better
placed to survive and thrive because of this.
5.3 Lloyds TSB staff, especially customer
facing relationship managers, are essential in ensuring that Lloyds
TSB can make its model deliver for customers. Lloyds TSB prides
itself on the experience of its relationship managers. Over 60%
of managers have been with the bank for more than 20 years. This
means that customers benefit from having managers who have faced
previous economic downturns and are, therefore, more knowledgeable
in advising businesses on how to survive the current threats.
5.4 Lloyds TSB actively promotes this relationship
banking approach and recently launched a six point charter for
small businesses. The Charter was launched to inject much needed
business confidence into the SME market. Lloyds TSB is committed
to continuing to support customers by doing everything possible
to ease the pressure facing small firms. The measures in the Charter
take the Bank's existing customer approach a step further and
mean that businesses that bank with Lloyds TSB have the best possible
support for the challenges to come:
The Lloyds TSB Charter for Small Businesses
1. Future reductions in base rate in 2008
and 2009 will be passed on in full to Lloyds TSB Commercial's
customers.
2. Lloyds TSB will not change the price or
availability of overdrafts during the period of a customer's agreement
(typically 12 months) as long as their accounts are maintained
within agreed terms and limits.
3. Lloyds TSB will agree to any reasonable
request for short term finance and do what we can to support any
viable business through temporary difficulties.
4. On renewal of an overdraft facility, Lloyds
TSB will only change the limit or the price if the risks associated
with that customer have changed materially.
5. Small business borrowing will not be switched
from base rate to LIBOR.
6. Lloyds TSB will host a series of 120 business
advice seminars across the UK to provide expert guidance and support
for small firms and to strengthen local networks of business professionals.
6. LENDING TO
SMES
6.1 Given the current economic challenges,
there is understandably political, media and public concern about
banks' lending policies and particularly how this impacts SMEs.
Lloyds TSB has no desire to reduce its support, either financially
or in the level of relationship management. Lloyds TSB wishes
to grow the business in this important sector and remains absolutely
committed to supporting SMEs as set out below:
— During 2008, total lending to SMEs
grew by over 18%.
— Lloyds TSB has continued to increase
overdraft limits during the past 12 months (now 6% higher than
one year ago).
— Customers have increased their use
of overdrafts during the past 12 months (over 10% higher than
one year ago).
— Across the portfolio, over 40% of
the value of overdraft limits remains available for further drawdown.
This indicates that there remains a significant level of credit
available to SMEs to assist their day to day cashflow requirements.
— Continuing the availability of undrawn
facilities on overdrafts has capital and cost implications. However,
Lloyds TSB is committed to keeping overdrafts available to ensure
cashflow flexibility exists for SME customers.
— Lloyds TSB has not moved businesses
from Base Rate linked overdrafts to LIBOR based overdrafts.
— Lloyds TSB was the first UK bank
to commit to pass on, in full, the November and December Bank
of England base rate reductions to SME customers.
— The price which is written for new
business is in line with the rates we have charged on existing
lending to our customers.
6.2 Lloyds TSB expects its total lending
to SMEs to continue to grow in 2009. However, businesses are expected
to cut back their investment as they review their plans for next
year. We are now seeing a much more cautious approach by customers
in making business decisions and this is evidenced by reducing
loan demand.
6.3 In line with a "through the economic
cycle" approach to lending to business customers, the bank
has not had to make any significant changes to credit policy,
ie the criteria adopted when lending money to businesses. Because
Lloyds TSB has been prudent in the boom times, it can help support
businesses in these tougher economic conditions.
6.4 Lloyds TSB's approach is to make lending
decisions as close to the customer as possible. All business lending
is conducted through our nationwide, dedicated team of relationship
and business development managers. The majority of our lending
is agreed and managed within local discretions, typically encompassing
lending up to £500k. That local discretion was extended last
year for businesses with a turnover of up to £15 million,
(previously £2 million).
6.5 Lloyds TSB is committed to the Small
Firms Loan Guarantee Scheme and volunteered earlier this year
to work with the Department for Business Enterprise and Regulatory
Reform (BERR) so they could undertake direct research with our
managers in order to further understand how the scheme was operating.
Last year, Lloyds TSB's share of SFLG lending was in line with
market share and, since the restrictions on lending to businesses
over five years old were relaxed in March, the Bank has seen a
34% increase in volume and 45% increase in value of new lending
under the scheme.
6.6 Going forward, Lloyds TSB intends to
participate in the Small Business Finance Scheme, recently announced
in the Pre-Budget report. We are also currently in discussion
with the European Investment Bank on how best we can access that
funding for our SME customers.
6.7 There will, of course, be instances
when banks are unable to provide businesses with the finance they
seek due to the financial position of the business and the outlook
for their markets. Lloyds TSB is a responsible lender and will
continue to ensure a customer's ability to repay is evident. It
is not in either the customer or the bank's interests to lend
money where there is a high likelihood of default. To do so would
put us in breach of commitments to the BBA Statement of Principles
and Business Banking Code which require us to ensure that we lend
responsibly.
7. SUPPORTING
SMES
7.1 Lending is of course only part of the
service that we provide. Lloyds TSB believes it is equally important
to ensure that local managers keep close to their customers and
provide help and guidance to put them in the best position to
weather the downturn. Lloyds TSB's 1,400 relationship managers
are based in 500 local business centres across Great Britain.
They have a network of contacts with business support organisations
and other professionals who can help customers with advice that
help them weather difficult times.
7.2 Lloyds TSB provide numerous customer
guides on its website covering business skills, such as "Managing
your Business" and "Financing", including specific
advice on "Planning for uncertain economic conditions".
The "Business in Britain" survey is published six monthly
and shares insights and trends from thousands of companies. In
addition, Lloyds TSB highlights support available externally such
as the Business Link website and we are currently building links
to BERR's own cash flow guides.
7.3 In response to the supplier credit issues
highlighted earlier and the longer trade terms, Lloyds TSB Commercial
can provide invoice discounting and factoring facilities, which
is an important means of providing much needed cash-flow. Lloyds
TSB Commercial Finance is a leading provider of such facilities
in the UK.
7.4 In 2009, Lloyds TSB is also launching
a nationwide series of seminars, specifically focussed on helping
customers manage through the current economic turmoil.
7.5 Lloyds TSB Commercial is fully committed
to the Business Banking Code and applies the requirements of the
Code to all of its customers with a turnover of up to £15
million, rather than just businesses with a turnover of up to
£1 million.
8. CUSTOMERS
IN FINANCIAL
DIFFICULTY
8.1 Lloyds TSB adheres to the Statement
of Principles that governs how banks and small firms work together
especially when there are financial difficulties. This includes
a pledge to give reasonable notice of concerns and take a constructive
approach.
8.2 Lloyds TSB will agree to any reasonable
request for short term finance and do what it can to support any
viable business through temporary difficulties. With local discretion
for managers, allowing quick decisions to be made, the aim is
to be able to support businesses through these challenging times.
8.3 Lloyds TSB has a good track record in
identifying and helping struggling businesses survive downturns.
The specialist help, through the dedicated Business Support Unit,
means that:
— 50% of higher risk businesses survive
and come out of the support unit.
— In 2007, Lloyds TSB was awarded Turnaround
Financier of the Year by the Institute for Turnaround.
8.4 For those businesses that are more critically
affected, the Bank contributes to funding and refers customers
to Business Debtline, an independent specialist business debt
counselling service. As the economic environment becomes even
more challenging, Lloyds TSB is committed to continuing to support
customers by doing everything possible to ease the pressure small
firms are now under.
9. CONCLUSION
9.1 Lloyds TSB has been able to maintain
its support to this critical sector because building relationships
with customers throughout the economic cycle is at the heart of
its strategy. Our strong and secure funding position enables us
to do this.
9.2 We are entering a more challenging period
for the economy and Lloyds TSB will continue to support its customers
during this difficult time, ensuring that they have access to
the finance, products, advice and relationships that they require.
December 2008
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