Examination of Witness (Question Numbers
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
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
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
advisersthis is a normal course of business; whenever we
take a large decision, we always review it after the factthe
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 downthat is the phrase you used a moment agodoes
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
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 banksmany 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 constituenciesand I might say I think
mine have had particular comments to make about Lloydsso
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
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.