Lloyds to Invest $4.2 Billion in Digital Push, Buy Back Shares

Lloyds Banking Group Plc
investors welcomed the British bank’s focus on cost discipline over the next three years and its renewed push on technology and insurance.

The London-based bank, which missed profit estimates for the fourth quarter, is targeting a cost-to-income ratio in the low 40s at the end of 2020, which would make it one of the most efficient European banks. Like competitors, it’s using artificial intelligence and big data to help control expenses. Lloyds pledged to invest more than 3 billion pounds ($4.2 billion) in IT.

Photographer: Chris Ratcliffe/Bloomberg

Seven years into his tenure, Chief Executive Officer Antonio Horta-Osorio, 54, is stepping up investment in technology as customers increasingly access their accounts online rather than visit branches. While the CEO helped steer Lloyds to profitability and full private ownership, the U.K.-focused bank is tied to the strength of its home economy, which faces uncertainty over Brexit and the prospect of higher interest rates.

“There is not much not to like: solid spread and cost performance, good growth opportunities,” David Herro, chief investment officer of Harris Associates LP, one of the top investors, said in emailed comments. “The only real negative has been the persistent conduct charges.”

Lloyds, which also detailed a well-flagged 1 billion-pound share buyback, climbed 2.4 percent to 69.49 pence at 12:41 p.m. in London trading. It’s the second-biggest gain among the lenders tracked by the STOXX Europe 600 Banks Price Index.

Britain’s largest mortgage lender indicated that its net interest margin and capital generation should all improve in 2018. From next year, it also sees a 14 percent to 15 percent return on tangible equity, a measure of profitability that would dwarf many peers.

Marring the results was yet another 600 million-pound charge for mis-sold payment protection insurance in the fourth quarter, which contributed to pretax profit falling 20 percent and missing analysts’ estimates.

For a detailed breakdown of Lloyds’s numbers, click here.

The CEO called the investment in technology a “massive undertaking” at a press conference in London. Investing in a digital transformation, closing branches and reducing the workforce were prioritized by the lender four years ago when it announced 9,000 job cuts and a 1 billion-pound tech investment. In 2016, the bank said a further 3,000 jobs would go, and last month revealed

to eliminate about 1,000 roles.

Still, the 3 billion pounds Lloyds plans to invest in tech over three years is far less than some of its rivals. Analysts at Autonomous Research LLP estimate that Deutsche Bank AG spends about $4.1 billion a year on information technology and Wall Street giant JPMorgan Chase & Co. around $7.4 billion annually.

The U.K. bank’s cost-income target contrasts with Switzerland’s UBS Group AG, which last month increased its target ratio to below 75 percent, from as low as 60 percent in a previous plan.

“Whilst the bank missed on profit, the results look robust to us,” Jefferies Group LLC analyst Joseph Dickerson said. The guidance “suggests Lloyds has materially re-assessed the earnings power of its business.”

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