Lloyds’ gradual advancement in wealth management has ignited discussions of a possible takeover as the banking behemoth seeks to enhance its services for high net worth individuals.
The FTSE 100 heavyweight withdrew from this sector in 2013 as part of a streamlining effort following the financial crisis, which included reducing its stake in St James’s Place, initially acquired through its takeover of Halifax owner HBOS in 2008, as reported by City AM.
In 2019, the bank re-entered the wealth market, forming an alliance with asset manager Schroders six years ago, a partnership that oversees £17bn in assets.
However, recent reports suggest Lloyds is considering terminating the agreement and purchasing Schroders’ 49.9 per cent stake.
“Lloyds’ wealth proposition is underdeveloped – even relative to UK bank peers,” stated 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 overall.
Toms and Bathurst noted that UK banks were generally “under penetrated” in wealth management compared to their international counterparts.
The aftermath of the PPI mis-selling scandal, followed by changes to Retail Distribution Review (RDR) rules, compelled UK banks to largely withdraw from wealth and advice services, the analysts explained.
However, over the past year, Britain’s banking giants have refocused their attention on this area with ambitious plans.
As Lloyds Bank grapples with enhancing its services, its ‘Big Four’ banking counterpart HSBC has made “generational” investments to reach a £100bn assets under management target.
Could Lloyds and Quilter be a match?
Analysts Toms and Bathurst suggested that one strategy Lloyds could employ to outpace its competitors is through an acquisition.
They posited that it would “make sense” for a UK bank to possess a wealth manager, as lenders are “well positioned to act as a more effective funnel into advised solutions”.
A takeover of the London-listed asset manager Quilter by Lloyds would “make sense,” they further added.
The termination of the Schroders partnership could signify the bank “clearing the decks before bolstering their affluent wealth offering through inorganic activity in our view”.
Toms and Bathurst estimated that Lloyds would need to shell out around £3.1bn to acquire Quilter, which could be “funded through excess capital and buyback forfeiture”.
Such a move would position Lloyds as the UK’s second largest wealth manager, managing just shy of £150bn in assets.
Lloyds’ AI investment to simplify deals
While the hypothetical transaction would make sense “strategically, financially and operationally,” the analysts noted that the situation was “more complex”.
The deal could yield approximately six per cent earnings per share growth and an 11 per cent return on investment.
However, this “would not be achieved in the short term”.
Tom and Bathurst noted that both Lloyds and Quilter would require time to “grow into the relationship over a significant time-frame” with limitations on advisers’ working capacity likely to present a “real limiting factor”.
Nevertheless, this could represent an arena where Lloyds’ artificial intelligence investments bear fruit to deliver “significant efficiency gains”.
The lender has embraced cutting-edge technology wholeheartedly in recent years through establishing its own “Centre for AI Excellence” under the leadership of former Amazon executive Rohit Dhawan.
Earlier this year, the institution dispatched 200 senior personnel to Cambridge University for an AI bootcamp offering a “bespoke six-month training programme” to bolster technological capabilities.
