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 per cent 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 (i.e. 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 per cent 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 per cent 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 per cent 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 per cent 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:


Fifty per cent 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