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A UK retail bank making big plans to expand in investment banking, and even considering international expansion? Given the country’s history, it’s not a notion that would immediately fill investors, or regulators, with confidence. But Lloyds Bank’s plan to build up its corporate and institutional division is a better idea than it sounds.
Growing in areas such as foreign exchange hedging and advising on bond sales for large corporations is expected to be a key part of the strategy that chief executive Charlie Nunn presents to investors over the summer. That’s a stark contrast with local rivals such as Barclays, which is reducing the relative weight of its investment bank in favour of Lloyds’ core areas of UK consumer and business lending. HSBC, meanwhile, is entirely pulling out of several areas such as advising on European mergers.
However, Lloyds starts from a different position: while Barclays is relatively small in some parts of the domestic market, Lloyds is the UK’s largest high-street lender with a market share of about 20 per cent in areas such as mortgage loans. That puts a limit on how far it can grow in consumer banking. Serving large corporate clients offers more green space for expansion, including in products that would help reduce its exposure to interest-rate movements.
Plus, it would not be building a business completely from scratch. Though it tends not to draw much attention to it, Lloyds does have a presence in areas such as sterling debt capital markets and leveraged loans.
Lloyds’ plan has some similarities to Wells Fargo, which occupies an equivalent position in the US market: a huge retail bank with an equine mascot and a chief executive called Charlie who wants to become a bigger player in investment banking. An important difference, however, is that Lloyds has shown no indication of wanting to break into the racier ends of the business. Lloyds, like Wells, has been recruiting more staff to serve hedge fund clients, but it is not trying to become a British Goldman Sachs — it is focusing on services such as cash management rather than prime brokerage.
Moving at a steady trot rather than galloping wildly ahead would tally with the approach Lloyds has taken in other areas such as build-to-rent housing, though there have also been hints of more radical ideas. At a recent meeting with investors, Nunn said the bank had discussed options such as using its retail banking tech to open a digital bank outside of the UK.
Lloyds is not alone in needing to get a little more inventive with its growth plans. With most big banks in decent shape after years of restructuring, and valuations finally back above historic averages, they can’t just rely on ever-rising capital returns to drive further share price gains. Investors should watch carefully for any signs of hubris but, in Lloyds’ case, the management team should have enough goodwill in the bank to be given a chance.
nicholas.megaw@ft.com
