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

Examination of Witness (Question Numbers 180-199)


12 JANUARY 2010

  Q180  Ms Keeble: You talked about year-on-year lending but the loan agreement, if I am right—was that just year on year? I thought the commitment was to the 2007 levels, which are obviously rather higher, are they not? Year on year lending, I think the BBA said that they are 4% higher, but that is from a very low base, is it not?

  Mr Daniels: The 2007 lending was a very high base and, as I have said, we are exceeding year on year our new lending. Our issue is that the repayments are in fact greater than had been anticipated, which is causing us difficulty in reaching the target.

  Q181  Ms Keeble: Are the terms of your loans the same as they had been previously, or is one of the reasons that people are deferring investment decisions the fact that the terms are just not acceptable, or unattractive?

  Mr Daniels: No, I can assure you we have published in Lloyds a charter where we have said that we will not turn down any reasonable business proposition first, that we will pass on any base rate reductions to our customers, and that we do not change pricing unless there has been a material change in risk. So I would assure you that our terms are not changed in order to discourage small businesses from borrowing from us. We are very proud of our record. If you look at Lloyds TSB and now the Lloyds Banking Group, we are the leader in lending to start-up businesses.

  Q182  Ms Keeble: In terms of possible sanctions, Lord Myners has indicated that the Government is unlikely to apply any if banks miss their lending targets. So what real pressure do you come under then to actually achieve them?

  Mr Daniels: We do not know if there will be sanctions or not. This is a question better placed to government. What we believe is that our mission is to serve our customers exceedingly well through the cycle, so to the extent that our customers need help, especially during these more difficult times, that is how we build relationships; that is what we believe is for the long-term good of our customer as well as our shareholders.

  Q183  Ms Keeble: Both you and Stephen Hester indicated that you felt that the reasons for the under-achievement of the target were due to the fact that many factors in the delivery actually were outside your control—the state of the economy, the state of the SMEs, their investment intentions, other players in the market and so on. Given that, it begs the question why you signed up to the targets if the delivery of them was outside your control, or were there simply factors there that you had not foreseen?

  Mr Daniels: I attempted at the beginning of our questions to try and clarify what the history was behind that. It was a concern by all that we could have a more serious economic problem unless banks were in fact lending to the SMEs and credit was available, and we were very concerned about the withdrawal of the foreign banks especially. Then other banks simply were not able to continue lending to these sectors. With that in mind, we designed this lending programme, if you will. I would also point out that the lending targets were an integral part of the government programmes at that time; in other words, they came as a package.

  Q184  Mr Todd: A rights issue would surely have been the opportunity for shareholders who either felt they were misled by the inadequacy of disclosure or had been deceived in the acquisition of HBOS in the first place to express their discontent, would it not?

  Mr Daniels: I would agree with you.

  Q185  Mr Todd: So you have taken the success of the rights issue as an indication that your shareholders are both confident in your future strategy but also not uncomfortable with your communication with them in the past and the decisions made to date?

  Mr Daniels: Mr Todd, I would never be presumptuous and I would not want to ever be complacent about how our shareholders feel but I think that this was an important vote for them, it was an important bridge to cross, and I believe that the confidence that the shareholders expressed is meaningful.

  Q186  Mr Todd: Let us turn to another thing that has been described as a form of rip-off, which was the Asset Protection Scheme as offered to Lloyds. The Financial Times, no doubt inaccurately, quoted a friend of yours as saying that you had felt that this was a fee for a scheme that had no genuine economic benefit. Was that your view?

  Mr Daniels: I am unfamiliar with the quote and I cannot imagine which friend of mine would be speaking to the newspapers but, that said, I think the way that it should be viewed is that when the capital rules changed, so virtually 11 months ago, in February and March of last year, we were basically required to have a capital level of a certain amount in a stress scenario. At that time there were very few options available and APS looked like the best option for our shareholders. That was why we recommended that our shareholders in fact vote for it. Subsequent to that, as the markets became open, or more open than they were, we looked for a market-based solution rather than a government solution.

  Q187  Mr Todd: So this had a genuine economic benefit at the time when alternative capital was scarce?

  Mr Daniels: We believed it did, yes.

  Q188  Mr Todd: Therefore there was no reason why the Government should not exercise a charge upon you for that period of comfort that they provided through the APS?

  Mr Daniels: That is correct. We believed that the charge was fair. We believed there was value received.

  Q189  Mr Todd: Good. So these stories of discontent with the way in which this was handled and your relationship with the Government over this are really unfounded?

  Mr Daniels: I would say that—

  Q190  Mr Todd: I am sure there were robust negotiations but nevertheless, you think it was a reasonable deal?

  Mr Daniels: Thank you. The negotiations were robust. We believed that it was a fair deal.

  Q191  Mr Todd: To what extent does your rights issue future-proof you—and one can never entirely say—against future capital adequacy requirements? Have you anticipated to some extent the likelihood of increased capital adequacy obligations?

  Mr Daniels: Certainly, when we worked with the regulators we applied the stress tests and we set our capital level to give us not only good buffers against the stress test but what we thought could be potential changes in the regulatory environment. Because the Basel requirements will change—they are under consultation—and it is not clear how they will finally come out, we cannot say that we are by any means bulletproof but we certainly did do some thinking, as we worked with the FSA and the other regulators, about what the future requirements would be.

  Q192  Mr Todd: So it went beyond an attempt to avoid the APS, which obviously you were keen to avoid, and attempted to place you in a satisfactory future environment?

  Mr Daniels: That is correct. We do not believe that we can go to market every five minutes. This is something our shareholders certainly will not tolerate. So what we attempted to do was to forecast accurately what will happen with our business and what will happen potentially with future capital requirements.

  Q193  Mr Todd: Was there a relationship between your participation in the APS and the European Commission's view on your market share position? Did you have some anxiety that further direct state aid might have some direct relationship to obligations to divest?

  Mr Daniels: We clearly believed that if we had taken greater state aid, the remediation would have been greater.

  Q194  Mr Todd: The remediation that was eventually agreed, there is a four-year time frame within which you would expect to carry that out. One would assume bearing in mind current market conditions you are not acting in haste.

  Mr Daniels: No, I think that, if you recall, we actually reached the agreement with Commissioner Kroes in November. We finally got the final permission in December of last year. So we are now in January and we will design a plan for an orderly disposal but we have not indicated a time frame yet. Clearly, what we want to do is to maximise the value to our shareholders.

  Q195  Mr Todd: You think four years—and you can never tell—is a reasonable time frame in which one could plan for that?

  Mr Daniels: One can never tell but we think it is a reasonable period.

  Q196  Mr Todd: How will this impact on the market share that you have within the various segments in which Lloyds is active?

  Mr Daniels: We are asked to sell 4.6% market share of current accounts, we are asked to dispose of about 19%—

  Q197  Mr Todd: So how much would that leave you with?

  Mr Daniels: That would leave us with approximately a 25% share.

  Q198  Mr Todd: Of current accounts, and then you have mortgages and small business market, which I think all were focused within the ...

  Mr Daniels: Mortgages would be the next most important, where we will give up about a fifth of our mortgage book. It depends; the share on mortgages is quite volatile so I do not know what it will be at the time, but I think we are probably somewhere in the 20-25% share range. Then in SMEs we are about a 20% player. With the sale of the branches that will decrement the share somewhat but not to the same order of magnitude.

  Q199  Mr Todd: To some extent will this be carried out purely by divestments or just simply conscious decision not to seek new business within these segments?

  Mr Daniels: No, what we will have to do is divest certain branches.

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