Lloyds’ “slow” progress in wealth management has sparked talks of a potential takeover as the banking titan looks to beef up its offering for high net worth individuals.
The FTSE 100 giant exited the area in 2013 as part of a simplification drive after the financial crisis, with the reduction of its stake in St James’s Place, which it first captured through its takeover of Halifax owner HBOS in 2008.
In 2019 the bank re-entered the wealth space, partnering with asset manager Schroders six-years ago in a tie-up that covers £17bn in assets.
But, recent reports indicate Lloyds is looking to ditch the agreement and buy out Schroders’ 49.9 per cent stake.
“Lloyds’ wealth proposition is underdeveloped – even relative to UK bank peers,” said RBC analysts Benjamin Toms and Ben Bathurst.
The Schroders’ partnership has average net inflows of 2.6 per cent, compared to five to seven per cent in Schroders as a whole.
Toms and Bathurst said UK banks were generally “under penetrated” in wealth management when compared to their overseas counterparts.
The legacy of the PPI mis-selling scandal followed by changes to Retail Distribution Review (RDR) rules forced UK banks to broadly retreat from wealth and advice services, the analysts said.
But over the last year Britain’s banking giants have locked their focus onto the space with bold plans.
As Lloyds contends with bolstering its offering the lender’s ‘Big Four’ banking peer HSBC has made “generational” bets to hit a £100bn assets under management goal.
Could Lloyds and Quilter be a match?
Toms and Bathurst cited one method Lloyds could use to pull ahead of its rivals was an acquisition.
The analysts said it would “make sense” for a UK bank to own a wealth manager with lenders “well positioned to act as a more effective funnel into advised solutions”.
A takeover of London-listed asset manager Quilter by Lloyds would “make sense,” they added.
The ending of the Schroders tie-up could represent the bank “clearing the decks before bolstering their affluent wealth offering through inorganic activity in our view”.
Toms and Bathurst said Lloyd would need to pay around £3.1bn to acquire Quilter, which could be “funded through excess capital and buyback forfeiture”.
Such a move would make Lloyds the UK’s second biggest wealth manager with just short of £150bn assets under management.
Lloyds’ AI investment to simplify deals
Whilst the theoretical transaction would make sense “strategically, financially and operationally,” the analysts said the story was “more complex”.
The deal could generate around six per cent earnings per share growth and an 11 per cent return on investment.
But this “would not be achieved in the short term”.
Tom and Bathurst said both Lloyds and Quilter would need to “grow into the relationship over a significant time-frame” with constraints on advisors’ work capacity likely to be a “real limiting factor”.
However it could mark an area where Lloyds’ AI investments prove fruitful to provide “significant efficiency gains”.
The bank has gone all-in on modern tech over the last few years with the creation of their own “Centre for AI Excellence” headed up by former Amazon executive Rohit Dhawan.
Earlier this year, the firm sent 200 senior staff to Cambridge University for an AI bootcamp providing a “bespoke six-month training programme” to enhance tech capabilities.