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Royal Bank of Scotland, Northern Rock and Lloyds Banking Group - Treasury Contents

Examination of Witness (Question Numbers 160-179)


12 JANUARY 2010

  Q160  Mr Fallon: Can I now turn to another part of your business? Your private equity group, Lloyds Development Capital, invests in some 60 businesses, I think around £2 billion worth of value. How much profit does that contribute to the Group?

  Mr Daniels: That would certainly be dependent on the time period that we would look at. The investments, as you know, are realised, the profits are realised, when there is an accounting activity, a sale, a rights offering or something like that. If there is an event, we would in fact revalue the company. So it tends to be very bumpy revenue and it comes in chunks rather than a nice, smooth business, as would be most of our normal business. So in any given period it can be very profitable or not profitable at all.

  Q161  Mr Fallon: Do you think it is right that a partly publicly owned bank should run such a substantial private equity business?

  Mr Daniels: We believe that private equity is an integral part of serving our customers well. Often, as you know, companies will need equity rather than debt because they need more permanent capital. They do not want to have the interest costs. Equity provides a very valuable function. What we believe is that the private equity group creates jobs, it creates companies, it creates a more vibrant economy.

  Q162  Mr Fallon: Of the businesses that you lend to, how many do you now effectively own?

  Mr Daniels: Of the businesses that we have lent to, how many do we effectively own?

  Q163  Mr Fallon: Yes.

  Mr Daniels: I could not give you a number but I would assure you it would be a very, very small number.

  Q164  Mr Fallon: Of the ones that you have converted debt into equity?

  Mr Daniels: Certainly, when there have been troubled loans and we feel that the debt burden is too high, we will entertain converting some of that debt into equity.

  Q165  Mr Fallon: But you do not have the figure of how many companies are involved?

  Mr Daniels: I do not have it to hand.

  Q166  Mr Fallon: How do you expect to return those companies to the full private sector when interest rates start to rise?

  Mr Daniels: We are very proud of our Business Support Unit, which is where we handle loans that have become somewhat more problematic or where customers have had issues. You may or may not know that our Business Support Unit has been around for a good many years. It is not a work-out unit; it is not simply to collect the money from problem loans, but rather it is to work with the customers in order to be able to restore the company to profitability and more normal ownership. Our Business Support Unit has recently doubled in size. We continue to work with our customers and our mission is to try and return the customers to more normal ownership and to continue to do business rather than simply to shut down and take them to pieces.

  Q167  Mr Fallon: Will you let us have a note on the number of companies involved?

  Mr Daniels: I would be happy to.

  Q168  Mr Tyrie: Mr Daniels, can I take you back to some of the answers you have just been giving. You have used in response to the issue of disclosures the phrase "thorough and appropriate" repeatedly, almost as if you have been briefed to do so by a lawyer. I wondered whether you might be prepared to use some other language to describe these disclosures. Do you really think that the Lloyds shareholders would have been as supportive of this deal had they known about the £25 billion loan?

  Mr Daniels: I absolutely do believe that. I think that the Lloyds shareholders had several opportunities to vote subsequent to that. The most recent was the rights issue, which we had in December. That was supported by 95%—

  Q169  Mr Tyrie: They are locked in by then, are they not, Mr Daniels? That is far too late. We are talking about at the time of the deal.

  Mr Daniels: Mr Tyrie, if I may, I said I believed that the disclosures were in fact more than enough for the shareholder to make an informed decision. The UK listing authority, the FSA, agreed with that, as did our Board, with external advice. So we believed that it was an absolutely appropriate disclosure. That was the first thing. The second thing, you asked whether the shareholders in fact would have made the same decision. It is a hypothetical question, much like the hypothetical question you asked me the last time. In trying to think through the answer, what I would tell you is that not only did we believe that the disclosure was fully adequate but that shareholders have had other opportunities; whether it was in March in our rights issues to extinguish the preference shares or in the rights issue in December, where we recapitalised the bank, they were given many opportunities to voice their discontent if they had believed that the disclosures were inadequate.

  Q170  Mr Tyrie: You told us just a moment ago that the shareholders had more than enough information in front of them to make a decision, but when I asked you last time you came before this Committee how much due diligence you had done, you said only a third to a fifth of what you would normally have done because the deal was done in a rush. What is the point of due diligence if you can arrive at more than enough information with only a fifth of the work?

  Mr Daniels: Thank you for the opportunity to clarify, Mr Tyrie. If you recall, my answer to your question of "Did you do enough due diligence?" was emphatically yes; we did 5,000 days of due diligence, we did the maximum that we were permitted to under the law. In an a posteriori review by the Board, supported by our external advisers—this is a normal course of business; whenever we take a large decision, we always review it after the fact—the Board remains fully satisfied that we did an excellent job on due diligence. You had asked the hypothetical question of, if there were no restrictions, would we have done more, and I think the answer was yes, of course, but that is a hypothetical question. The real answer and the full answer that I gave initially was that we in fact did do very robust due diligence, that we had a good view of the company.

  Q171  Mr Tyrie: When the tripartite come to you and say that they are extremely concerned about a business, and they clearly told you that there might be wider repercussions for the whole of the financial sector if that business goes down—that is the phrase you used a moment ago—does it not cross your mind that there might be negative value in that business rather than positive value?

  Mr Daniels: Very clearly, we understood that the book value of the business was substantially inferior. That is in fact why we offered much less than the book value, for exactly the reasons that you have talked about.

  Q172  Mr Tyrie: But you offered a positive value when this business was worth nothing, did you not?

  Mr Daniels: I do not believe the business was worth nothing. I believe the business was worth less than its book value, and we in fact paid less than its book value.

  Q173  Mr Tyrie: Do you not think that it is understandable that Lloyds shareholders will feel they have been ripped off?

  Mr Daniels: I basically feel that all bank shareholders have been impacted by the downturn. Very clearly, share prices have slipped and dividend policies have changed, and that is very clearly the case in Lloyds as part of the industry, and for that we are deeply sorry; that clearly has impacted our shareholders and we feel especially for the small shareholder. That said, we are working full out to create value for our shareholders, to in fact ensure that our share price rises and that our profitability rises and that we return to a dividend bank status.

  Q174  Ms Keeble: I wanted to ask about the lending obligation that you had with the Government for small businesses. You signed up to some very specific targets and on 19 December the bank said that it was not going to be able to or did not expect to reach those. Do you actually have the figures and did you reach the target?

  Mr Daniels: Thank you for the question, Ms Keeble. The targets are set from March to March, so we do not have the results yet. If I may, we worked with government in terms of the reasoning behind the setting of those targets. What we were all concerned about, the banking population as well as government, was that with the withdrawal of foreign banks, the Icelandic banks, the Dutch banks—many of the foreign banks basically withdrew from the UK market last year, and we were all very concerned that, with that withdrawal, small and medium-sized enterprises especially would not have the necessary financing to continue their businesses. As we know, SMEs, the small and medium-sized enterprises, contribute over half the employment in the UK and contribute to over half of the gross domestic product. So we were very concerned. We worked with government to see how we could make up for that shortfall. That was the reasoning behind the establishment of targets. If I may—

  Q175  Ms Keeble: I am sorry but I am actually quite tight for time as well. I wonder if you could just say what it looks like you are going to do now in terms of achieving the targets. Are you getting closer to achieving them, do you think?

  Mr Daniels: Clearly, in the case of the mortgages we are meeting and exceeding the run rate for our targets. In the case of small businesses, despite having much exceeded our new lending, so we are up 10% year on year, repayments by SMEs, as they have had less need for financing because they have cut their inventories and they have cut back their investments, we have had far more repayments than we thought we would, but in terms of new lending, we are absolutely lending. The issue is, on a net basis, because of the repayments, we are having in fact some difficulty meeting the targets that we originally set.

  Q176  Ms Keeble: But there are discrepancies between what is being said and what you are saying, which is very similar to what Stephen Hester was saying, and all the information that we get from small business organisations and also from small businesses in our own constituencies—and I might say I think mine have had particular comments to make about Lloyds—so why is there this dissonance, with yourselves saying you simply do not have the demand and the small businesses saying "We can't get the loans"?

  Mr Daniels: Ms Keeble, if you have specific cases, I would be very happy to review them with you.

  Q177  Ms Keeble: But the general point is obviously ...

  Mr Daniels: The general point is that the availability is absolutely there. If we look at the amount of overdraft usage, which is a good leading indicator of how much demand there is, we are seeing our overdraft usage remain relatively flat. If we look at applications and the approval rates of applications, those continue to be 80% plus, as they have been in the past. So we are not by any means restricting credit.

  Q178  Ms Keeble: The commitment was about lending, which I would have assumed was formal lending. Overdraft lending has had a different profile, and that must be much more expensive for the SMEs. Are you satisfied with providing overdraft lending instead of providing loans?

  Mr Daniels: Excuse me. I did not mean by any means to imply that overdraft lending was the only way that we were providing lending. That is the smallest part of our lending.

  Q179  Ms Keeble: No, I understand that but there is a different profile, is there not, for the take-up of overdrafts by SMEs compared with the provision of loans?

  Mr Daniels: The overdrafts are the smallest part of our lending. I simply used that as an indicator because that usually shows you where first demand is coming, and I was simply saying that that indicator looks flat. Our lending actually takes the form of more permanent lending or longer term lending other than simply overdrafts, because that is generally what SMEs need.

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