THE UNIVERSITY OF SUNDERLAND

PGBM16
Global Corporate Strategy
Lloyds Banking Group
Timothy Kamau

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Table of Contents
Executive Summary.........................................................................................................................3
Introduction.................................................................................................................................4
Lloyds Banking Group competitiveness in the global financial services industry...........................5
Lloyds Banking Group’s Strategic alliances, Mergers and Acquisitions’ (M&A’s) and global
competitiveness...............................................................................................................................7
Corporate governance, corporate social responsibility (CSR), leadership and competitiveness at
Lloyds Banking Group......................................................................................................................9
Corporate governance framework..............................................................................................9
Board Authority............................................................................................................................9
Group strategy.............................................................................................................................9
The role of the Board Committees.............................................................................................10
Subsidiary governance...............................................................................................................10
Personal reflections on learning and understanding the Global Financial services industry
competition....................................................................................................................................11
References.....................................................................................................................................12

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Executive Summary
Managing risk effectively is important for any bank and is fundamental to the strategy of Lloyds
Banking Group. The group is now a low cost, low risk, UK focused retail and commercial bank.
This has been achieved by maintaining a conservative business model which embodies a risk
culture founded on a prudent appetite for risk.
The groups approach to risk is founded on an effective control framework and a strong risk
management culture which guides how its employees approach their work, the way they
behave and the decisions they make. The amount and type of risk that they are prepared to
seek, accept or tolerate, otherwise known as risk appetite, works in tandem with its strategy
and is approved by the Board. Lloyds Banking Group risk appetite is then embedded within
policies, authorities and limits across the Group.

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Introduction
Lloyds Banking Group is a leading provider of financial services to individual and business
customers in the UK.
The main business activities are retail and commercial banking, general insurance, and long-
term savings, protection and investment. They provide their services under a number of well
recognized brands including Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows and
through a range of distribution channels including the largest branch network in the UK and a
comprehensive digital proposition.
Lloyds Banking Group is a global player in the financial services industry, operating in different
regions of the globe either directly or through partners which follows that they operate in
common markets in some regions. This therefore means that apart from concentrating on
traditional conventional markets they also have to target emerging markets that offer a high
growth potential so as to realize growth. As a result of the general nature of customers’
financial needs, the core financial services offered by the banks are more or less similar and are
broadly categorized as retail, consumer or personal banking that targets individual customers
or small businesses and institutional, commercial or corporate banking for larger institutional
clients. It is the strategic approach adopted by each bank when providing these services that
sets them apart, for example, these strategies result in different services and products,
different marketing strategies, different operational strategies and so on. These strategies
therefore call for a lot of innovation, market awareness and of course capital. To understand
the nature of competition faced by Lloyds bank in this global market we will look at retail or
consumer banking as well as corporate or institutional banking and explore the services or
products offered by each bank, the markets covered by these banks in terms of geographical
coverage and number of clients and also the level of investments and revenues. .
(http://www.lloydsbankinggroup.com/our-group/)

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Lloyds Banking Group competitiveness in the global financial services
industry
A statement by Antonio Horta-Osorio, the Group Chief Executive Officer of Lloyds Banking
Group plc highlights the competitiveness of the Lloyds Banking Group. The statement has been
taken from the group’s 2014 annual report (Lloyds Banking Group plc, market line).
The Board recognizes the importance of sustainable and growing dividends to its shareholders
and has announced the resumption of dividend payments, with a recommended dividend
payment of 0.75 pence per share in respect of 2014. This is a symbolic development that bears
testament to its successful transformation and improved risk profile of the business. Given this
strong strategic progress and the improvement in its financial performance and position, the
group has a firm foundation to deliver the new strategic priorities that it set out in October and
are well placed to continue to support and benefit from the strengthening UK economy and to
be the best bank for its customers and shareholders.
2014 was a year of continued delivery for the Group, with the achievement of the key
objectives set out in our 2011 strategic plan resulting in a significant transformation of the
business and improvement in performance. Strategically, it is now a low risk bank, with a strong
balance sheet and funding position and industry cost leadership, all of which provide
competitive differentiation. This delivery has, in turn, enabled the UK government to make
further progress in returning the Group to full private ownership. In 2014 the UK government
reduced its shareholding through the second successful sale of part of its stake in March and
the launch of a pre-arranged trading plan in December which provides a means for an orderly
sell down that will end no later than June 2015. On 20 February 2015, we were advised that
UKFI’s interest in the Group had reduced to 23.9 per cent. In the summer, it sold 38.5 per cent
of TSB via a well-received Initial Public Offering, with this and the subsequent sale of a further
11.5 per cent stake in September resulting in the group being firmly on track to meet its
European Commission State Aid commitments. The Board recognizes the importance of
sustainable and growing dividends to its shareholders and is today announcing the resumption
of dividend payments, with a recommended dividend payment of 0.75 pence per share in
respect of 2014. This is a symbolic development that bears testament to our successful
transformation and improved risk profile of the business (Lloyds Banking Group plc, market
line).
Given this strong strategic progress and the improvement in the group’s financial performance
and position, it has a firm foundation to deliver the new strategic priorities that it set out and
are well placed to continue to support and benefit from the strengthening UK economy and to
be the best bank for its customers and shareholders (Lloyds Banking Group plc, market line).
Lloyds Banking Group has delivered a significant improvement in financial performance at both
an underlying and statutory level. Underlying profit has increased by 26 per cent to £7,756
million, with the Group’s return on risk-weighted assets (RoRWA) improving by 88 basis points
to 3.02 per cent from 2012. At a divisional level, all the groups banking businesses delivered a
robust performance with improvements in underlying profit and RoRWA in its Retail,
Commercial Banking and Consumer Finance divisions after increased investment made to
deliver growth. Underlying profit was lower in the Insurance division, reflecting the challenging

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market backdrop and regulatory and legislative changes that have similarly affected the wider
industry (Lloyds Banking Group plc, market line).
While the introduction of Competition and Credit Control (CCC) in 1971 signalled the beginning
of the process of deregulation, it is widely recognized that the 1979 Banking Act represented
the starting point for a permanent change in the competitive character of British banking
(Pozdena and Hotti, 1985). The abolition of the clearing bank cartel arrangements in 1971 and
the hope of a ‘market-based’ approach to the control of credit through interest rates soon gave
way to the re-appearance of quantitative controls in 1973, in the wake of rapid growth of bank
credit and the secondary banking crisis. The 1970s witnessed several shifts of emphasis through
the imposition and relaxation of quantitative controls, in the form of restrictions on the growth
of bank liabilities and the call of Supplementary Special Deposits that severely compromised the
spirit of the purpose of CCC. The Banking Act regularized banking supervision by extending the
supervisory authority of the Bank of England to all deposit taking institutions except for Building
Societies. Deposit taking institutions were separated into ‘recognized banks’ and ‘licensed
deposit takers’, but more significantly, the Banking Act provided a mechanism by which non-
bank institutions could enter the retail banking market, removing a former barrier to entry
(Mathews, Murinde, Zhao, 2005)
A government enquiry into competition in UK banking (Cruikshank, 2000) concluded that while
the market for personal retail banking was consistent with monopolistic competition, as
evidenced by sustained abnormal returns, there were signs of ‘new entry and increased
competition’ that would improve information flows and result in a convergence of pricing. The
report recognized that banking involves ‘joint products’ or ‘bundled’ services that can lead to
overpricing and underpricing on different products. However, new entrants target specific
banking products. Although they may form part of a larger banking group, entrants often
specialize in products such as mortgages, unsecured loans and credit cards. This entry activity
tends to increase the intensity of competition in these niche markets (Mathews, Murinde, Zhao,
2005)

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Lloyds Banking Group’s Strategic alliances, Mergers and Acquisitions’
(M&A’s) and global competitiveness
The main characteristics of this process in the 1990s were the emergence of “mega banks” at
the national scale, a slight increase of cross-border transactions and the emergence of few large
pan-European financial groups. Building on an extensive review of the US and EU literature, we
examine the impact of M&As in European banking and more on Lloyds Banking Group
profitability and efficiency, considering the breakdown between domestic and cross-border
transactions. We first proceed with the profitability analysis of distinct completed M&A’s cases
with different industrial strategies (based on the geographical dimension of the transaction and
the initial activities of the merging banks). We find that domestic mergers contribute to cut
costs for both partners, whereas, for the majority of cases studies, including domestic and
cross-border mergers and acquisitions, the impact on profitability is insignificant, but a clear
trend to diversify the sources of revenues was apparent (Ayadi, Pujals, 2005)
The Lloyds Banking Group sector has experienced a rapid process of merger and acquisition
(M&A) during the 1990s. Besides deregulation, technological and financial innovations and the
introduction of the euro, the imperative of value creation, efficiency and market power have
fuelled the process. Despites the break in the M&A trend in 2001 and 2002, which was mainly
associated to the economic downturn, it seems that the world-wide M&A activity is picking up
again announcing a new M&A wave. Indeed, faced with increased risks, uncertainty and
enhanced competition, banking institutions will adopt the most economic strategic means to
cut their costs and enhance their revenues. Moreover, the progress made in the Financial
Services Action Plan (FSAP) followed by the new European Commission’s initiatives towards
complete integration of European financial markets and the new rules-setting envisaged by the
new Capital Adequacy Directive 3 will act as an additional impetus to accelerate banking
consolidation in the coming years (Ayadi, Pujals, 2005).
Many studies however, have found that M&A’s are far from having proved their economic
effectiveness. Consequently, one can question the real impact of these operations on banking
performance, including profitability and efficiency. As big banking groups like the Lloyds
Banking Group emerge at the domestic level, this might raise competition concerns when the
concentration threshold in a relevant market is reached. In the medium term, the acceleration
of cross-border and cross-sectorial transactions is inevitable, envisioning a more integrated
European banking market. Finally, by accelerating the pace of strategic responses, the M&A
process might lead to the homogenization of Lloyds Banking Group behavior. This raises the
possible emergence of a dominant banking business model in Europe.
The evolution of the average transaction value is very interesting. After a steady growth
between 1994–99, it jumped to reach a peak in 2000. As a consequence, the transaction value
was especially large at the end of the decade. In practice, this is reflected by the emergence of
‘mega-banks’ operating at a national scale in the major EU countries (Lloyds Banking Group in
the UK, BNP Paribas in France, SCH and BBVA in Spain, IntesaBCI and UniCredit in Italy, RBoS
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Group in UK and Bayerische HypoVereins bank in German). These developments indicate that a
growing M&A activity will lead in the medium to long term to the co-existence of a few large
actors at the domestic level, which will result in more concentrated banking markets.
Financial Services Agreements, Estimating Professional Fees, and the Importance of Integrity
155 square solid second, the CPA closely collaborates with the investment banker concerning
his client’s tax issues, especially as they can be addressed by various alternative provisions in
the imminent transaction. Related CPA fees may well reflect this work (Roberts, Dennis J, 2009).
Cross-border consolidation activity was fairly modest in the first half of the 1990s. Domestic
deals constituted the majority of M&A activity, accounting for 87% in number, and 90% in total
value over the period 1994–2000 (see Figures 5 and 6). This evolution has clearly contributed to
increased levels of concentration within individual European banking markets. As shown
previously, the domestic consolidation process is advancing to the point at which the domestic
markets are starting to reach a saturation level, encouraging banking institutions to move
beyond their national frontiers to seek new growth opportunities. The statistical results show
the predominance of domestic consolidation throughout the entire period, but a marked
increase can be observed in cross-border transactions starting in 1999 to reach 42% in number
and 30% in value in 2000. This modest growth of cross-border consolidation could be partly
attributed to the elimination of the currency barriers stemming from the creation of the
Economic and Monetary Union (EMU) in 1999 and the introduction of the euro (Ayadi, Pujals,
2005).
Risk has two sides: underestimating it harms the investor, while overestimating it prevents the
implementation of bold business projects (Chong, Yen Yee, 2004).
To conclude, the recent consolidation process has been structural, profound and dynamic.
Moreover, the same tendency is likely to continue towards the creation of both domestic and
pan-European mega-banking groups. Indeed when the possibilities for acquisitions are
exhausted in a domestic market and the concentration threshold is attained, banking
institutions will look for other potential external growth opportunities in other markets.

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Corporate governance, corporate social responsibility (CSR), leadership
and competitiveness at Lloyds Banking Group
The Group is led by a Board comprising a Non-Executive Chairman, independent Non-Executive
Directors and Executive Directors. The Board is collectively responsible for the long-term
success of the Company. It achieves this by setting the strategy and overseeing delivery against
it, establishing the culture, values and standards of the Group, ensuring that the Group
manages risk effectively, monitoring financial performance and reporting and ensuring that
appropriate and effective succession planning arrangements and remuneration policies are in
place.

Corporate governance framework

The Group’s corporate governance framework, which is reviewed annually by the Board,
comprises the board authority and the delegated executive authority.

Board Authority
The board authority sets out the matters reserved to the Board. These include decisions
concerning the strategy and long-term objectives of the Group, the Group’s capital, medium-
term plan and financial budgets, significant contracts and transactions and various statutory
and regulatory approvals.
The approval of the remuneration policy, risk appetite and risk management framework is also
reserved to the Board. The board authority delegates responsibility for day-to-day management
of the business to the Group Chief Executive and sets out the basis for delegation of authorities
from the Board to Board Committees.
Delegated executive authority The Group Chief Executive, through the delegated executive
authority, delegate’s aspects of his own authority, as permitted, to members of the Group
Executive Committee (GEC). The GEC meets weekly to scrutinize items of key business. The
Group Audit Director, Group HR Director and the Company Secretary attend the weekly GEC
meetings to ensure that there is appropriate internal audit oversight, that employee interests
and people strategy matters are considered and that the highest standards of corporate
governance are maintained, including the escalation of matters to the Board and its
Committees.
The Lloyds Banking Group benefits from the depth and diversity of experience within the
management team. The team’s complementary skill sets strengthen the Group’s ability to
effectively adjust to changing market environments, deliver on our strategic plan and become
the best bank for customers.

Group strategy
The Board spent considerable time in 2014 debating the strategic priorities for the business
over the next three years. There were several meetings which focused entirely on Group
strategy, including a two day off-site. The Group announced in October that, having successfully

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rebuilt the Group’s financial strength, its future focus will remain on continuously improving the
customer experience. Through our multi-brand, multi-channel distribution, we will transform
our digital capability, continue to simplify our operations and processes, and invest in the
business to become the best bank for customers and thereby deliver strong, sustainable returns
to shareholders. (http://www.lloydsbankinggroup.com/our-group/)
In June and July 2014, as part of the divestment mandated by the European Commission, the
Group completed an initial public offering of 38.5 per cent of the ordinary shares in TSB Banking
Group plc (TSB). A further 11.5 per cent was placed with institutional investors in September,
reducing the Group’s interest in TSB to approximately 50 per cent. The significant investor
demand for shares in TSB, reflected confidence in the prospects for the business.
The divestment of TSB occupied a considerable amount of the Board’s time in 2014. It is an
important step for the Group as we act to meet our commitments to the European
Commission.

The role of the Board Committees

The Board is supported by its Committees which make recommendations to the Board on
matters delegated to them, in particular in relation to internal control, risk, financial reporting,
governance and remuneration matters. This enables the Board to spend a greater proportion of
its time on strategic, forward looking agenda items. Each Committee comprises Non-Executive
Directors only and is chaired by an experienced Chairman. The Committee Chairs report to the
Board on the activities of the Committee at each Board meeting. Information on the
membership, role and activities of the Nomination & Governance, the Audit and the Risk
Committees can be found on pages 73 to 81. Information on the Remuneration Committee can
be found in the Directors’ remuneration report on pages 82 to 103. Terms of Reference for
each of the Board Committees can be found on the website at www.lloydsbankinggroup.com

Subsidiary governance
The Group conducts the majority of its business through a number of subsidiary entities. The
Boards of the four main companies, Lloyds Banking Group plc, Lloyds Bank plc, HBOS plc and
Bank of Scotland plc, comprise the same Directors. The Board meetings for these companies are
held concurrently with the agenda split between the companies to allow decisions to be taken
and scrutinized by the appropriate Board. In addition the Group has an insurance subsidiary,
Scottish Widows Group Limited, which itself also has a number of separate operating
subsidiaries. The Board of Scottish Widows Group Limited, which also sits as the Board of its
major subsidiaries, is chaired by a non-executive member of the Lloyds Banking Group Board
and contains a balance of independent non-executive directors, Group executives and
Insurance Division executives. This composition supports its legal and regulatory requirements
for independent decision making within the overall framework of Group policies and controls.
To help manage the legal, regulatory and reputational risks associated with the Group’s
subsidiary entities, the Group requires that subsidiary boards and their directors meet

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minimum governance standards, as laid down in the legal entity management standards and
directors’ handbook (http://www.lloydsbankinggroup.com/our-group/).

Personal reflections on learning and understanding the Global Financial

services industry competition
While the Lloyds Banking Group are all proud of its achievements, the group recognizes that
this is a base for the future, not the end of the strategic journey. There are major changes in the
environment as well as its own capabilities that need to be addressed in the next phase of its
development to become the best bank for customers and shareholders.
The next phase of the group’s strategy, announced in October, outlined how it will focus on
creating the best customer experience, becoming simpler and more efficient and delivering
sustainable growth. As a big bank, the group has spent much time discussing how it could take
the business forward, recognizing the impact that the evolving regulatory and competitive
environment and customers’ changing needs are having on their UK retail and commercial
banking focused business. The group believe that digital transformation in particular will result
in more fundamental change occurring in the banking industry over the next decade than they
have seen in the last many years.

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Lloyds Banking Group plc Marketline Company Profile, 33. Business Source Elite.
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