Examination of Witness (Question Numbers
12 JANUARY 2010
Q180 Ms Keeble: You talked about
year-on-year lending but the loan agreement, if I am rightwas
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
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 controlthe 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
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
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
Q187 Mr Todd: So this had a genuine
economic benefit at the time when alternative capital was scarce?
Mr Daniels: We believed it did,
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
Mr Daniels: That is correct. We
believed that the charge was fair. We believed there was value
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
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 youand one can never entirely
sayagainst future capital adequacy requirements? Have you
anticipated to some extent the likelihood of increased capital
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 changethey are under consultationand 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
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
Q195 Mr Todd: You think four yearsand
you can never tellis 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
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.