When LloydsTSB (LYG) agreed to a merger with HBOS last September in a government led rescue, it was well documented that the combined entity with significant overlap in branch coverage would sooner or later cut costs and close branches. However, most commentators agreed the enlarged Lloyds Group would be inviting a PR disaster if it cut jobs just after tax-payer bail-out. The bank would wait until it had a firm mechanism in place to repay the government cash.
That day has come. On the 8th June, Lloyds Group progressed from being a rescued bank, obliged in difficult times to consider the social implications of cost-cutting, to a recovering bank firmly grasping the bottom rung of the independence ladder. Monday's announcement confirmed £2.5 billion ($4.1 billion) is to be paid to the government in the first repayment tranche.
On any other day, that in itself would be cause for optimism. The bank is now not only in a stable condition, but is pleasingly sufficiently robust to honour its large obligation to the tax-payer. Furthermore, it actually raised £4.3bn ($7.1bn) in the equity issue, more than enough to cover the initial £2.5bn repayment. Unfortunately, celebration isn’t appropriate. On the same day, the bank announced it was to close later this year 164 Cheltenham & Gloucester branches, with the loss of 1,660 jobs.
The C&G brand has served Lloyds well since it was acquired in 1997. Not surprisingly, shareholders will fare better than employees. The bank is now free to plan a new dividend strategy, which was put on hold in line with the rescue package terms. HBOS staff in particular, will dread the call of an unexpected branch meeting for some months yet. After all, the bank isn’t called HBOS Group. Apart from ruining the year for hundreds of loyal staff, Lloyds Group management have been busy recruiting two leading real estate firms, CB Richard Ellis Group and Jones Lang LaSalle. The appointment is designed to investigate the feasibility of sale and leasebacks, or disposals, on a number of its commercial properties. A number of news sources also suggested the bank was in talks to sell the fund management group, Insight, which it inherited as part of the HBOS deal.
In summary, the first repayment of rescue funds is most welcome. However, Lloyds Group still owes around £14.5bn ($23.8bn) to the tax-payer and further significant re-organisation of the group is inevitable. More job cuts will follow. Tighter regulation and risk-controls will be a drag on lending related earnings long into the future. But the financial integrity of the group’s balance sheet is no longer in question and the first step in the long journey to normality has been made.