Lloyds Banking Group Plc. (LSE: LLOY) is another long term current holdings position. The global finanical services and banking industry has been hit with unstableness, risk and heavy criticism since the mist of 2008, in which Lloyds Bank certainly was not omitted from. Nonetheless, since then the Bank has reformed itself as a safe, low risk and simple banking operation in the UK and one of the sturdiest banks across Europe.

1. Vigilant Leadership



img_0168Source: Annual Reports


Annual Bonuses

  • Maximum is 140% of base salary for management.
  • Measured by Profit Before Tax, total shareholder return and income ratios

Long term incentive plans

  • Lloyds shares or nil (£0) cost options.
  • Maximum is 300% of base salary.
  • Measured by Total shareholder return and economic profit.

Fixed Share award

  • Lloyds shares, realised over 5 years, 20% each year following the year of award.
  • Maximum is 100% of base salary for management.

2. Long term prospects

Persistent operations: 

Lloyds Bank since its near 2008 meltdown, has increasingly improved all it’s banking operations. Lloyds has since become a low risk operation, vastly reducing their leverage ratios and focusing asset growth on consumer loans and deposits.

Lloyds is now one of the sturdiest banks in Europe, ownership is turning back into private hands as the UK Government has vastly reduced it’s shareholdings in Lloyds from 43.5% to under 6%.

During the 2008-09 finanical crisis, the UK Government stimulated Lloyd’s Bank to abandon global ambitions and recast itself as a safe domestic Bank for UK households and businesses. Such lowered risks increases the run-way of the bank as well as reduces future risks of another meltdown.

Technological Advancements:

1. Signature Verification – This new technology will help eliminate problems caused by human verification, and the time required would almost become immediate.

2. Facial and fingerprint recognition – Not only would this technology add to the security of the banking system, however also to serve customers more efficiently.


  1. Credit Risk – Adverse changes in the economic environment or credit quality of customers.
  2. Insurance Risk – Longevity, persistency and property insurance.
  3. Market Risk – Adverse market rates and credit spreads in the banking and insurance businesses.
  4. Domestic exposure Risk – Exposure to adverse UK economic policies or changes with little international diversity.

Solutions to risks:

  1. Extensive and thorough credit processes and controls to ensure effective risk identification, management and oversight.
  2. Insurance processes on underwriting, claims management, pricing and product design seek to control exposure to these risks for Lloyds.
  3. Structural hedge programmes have been implemented to manage liability margins and margin compression, and the Group’s exposure to central Bank Base Rate changes.

3. Stable and Understandable Business Economics

Understandable business economics


Over the past 5 years, increases in retail lending has supported nominal growth in the UK banking industry. The flow of credit to UK banks has also further improved. Industry revenue ( £ 121 Billion) is expected to grow at a compounded annual rate of 4.5% respectively. However, commercial lending in the industry has remained weak due to tighter regulatory environments, strict lending criteria and restricted lending criteria.

Rank in industry:

img_01554th by asset size, with total assets of £ 848 Billion (2016).Lloyds is also the UK’s largest retail bank (by branches).

Operating segments:

1. Retail Banking. 2. Commercial Banking. 3. Consumer finance. 4. Insurance

Barriers to entry:

* Estbalished branch network *Access to customer information. * High regulatory requirements * High costs to operate * High capital tier 1 ratios to maintain.

Competitive Advantages: (MOATS!!!)

  1. Simple, low cost, low risk operating model.
  2. Multi-channel approach (largest retail branch network).
  3. Increasing finanical strength and returns.
  4. Extensive knowledge on the domestic UK market.
  5. Market leading cost:income position

Major Competition:

img_0176Funding and Income: (2016)

  • Share capital = £ 7 Billion
  • Additional Paid in capital = £ 17.4 Billion
  • Retained earnings = £ 4 Billion
  • Long term debt = £ 23 Billion
  • Cash&balances at central banks = £ 70 Billion
  • Net income = £ 1.3 Billion
  • Net Interest income – > Largest contributor – > Loans & advances to customers.
  • Net Interest expense – > Largest contributor – > Interest payable.
  • Assets – > Largest contributor – > Loans and Mortgages (50% of assets)

Growth Prospects (Long term):

Growth in…* Mortgage volumes (targeting first time buyers)    * unsecured consumer borrowing     * SME borrowing     * Consumer deposits     * Current account switches      * And dominating UK branch outlets


img_0175Source: Buffettbooks



 4. Price to Valuation

From computing a discounted free cash flow model, along with taking the net tangible assets of Lloyds Banking Group Plc. discounting them back to today’s present value using a 8% discount rate and a 15% perpetuity discount rate to be Intrinsically valued between £ 0.60p – £ 0.80p per share. Which equates to £ 43 Billion – £ 57 Billion for the entire banking company. The current uncertainty and instability was also taken into consideration in this valuation.

5. Summary

A combination of strategic and improving finanical performance underpinned by Lloyds low risk, simple operating model encouraged by the UK Government, positions the bank well for the upcoming uncertainties in the UK and European political, competitive, economic and regulatory environments. The bank is increasing it’s position to becoming the best bank for customers and Small-Medium Enterprises, whilst mitigating risks for shareholders. With more of the bank now returning to private hands, this provides greater reassurance for Lloyds long term prospects in the UK banking industry.

Anything misunderstood? View the Definitions here.

Jordonlee W. Smith

One thought on “Lloyds Banking Group Plc.

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