1. ACCORD CONFERENCE Banking: Our Strategy, Politics and Regulation to 2015 Dominic Morris 26 APRIL 2012

2. 2 INTRODUCTION  How hard to get the message across? Where do you rank banks vs big pharmaceuticals, oil, junk food, alcohol, estate agents, tobacco industry?  Very few signs of improvement in 2011 (see next slide)  Several banks went backwards  Variance in brands. But Lloyds Banking Group closing the ‘negative gap’ (S 09 -22% W 11 -8%)

3. 3 FAVOURABILITY – All MPs Nationwide are clear leaders with HSBC and Barclays in second place Favourability towards Lloyds TSB and LBG have increased, but MPs are now less favourable towards Halifax 3

4. 4 WHY?  Lending (not)  Bonuses: US attitudes to Capitalism and Scandinavian Puritanism.  Misselling  General public beginning to feel the pain  Characteristics of Balance Sheet Recessions  All banks regarded the same  i-banks tarnish retail/commercial (some allowance for mutuals)  Need to differentiate

5. 5 THE TIDE OF REGULATION Change, Change, Change… Source: Lloyds Banking Group data >80 Consultations in 2003 300+ Consultations in 2011 400+ expected in 2012 Run rate c.420 consultations in 2012

6. 6 REFORM IS NECESSARY BUT REFORMERS HAVE INCONSISTENT GOALS  Crisis had many causes. But search for a ‘single club’ solution  Tensions between stability and growth agenda  Higher capital/liquidity = less lending capacity  Unintended consequences  Bail-in + depositor preference = reduction in senior unsecured funding = higher cost of money market funds = dearer mortgages/loans  Ring fencing may increase corporate reliance on foreign banks  Solvency II rules could knacker UK annuities market  Inconsistent rules  Vickers vs. Volcker  But combination of capital/liquidity, ‘living wills’, governance/ incentive changes, ring-fencing and better micro/macro-prudential regulation will lead to safer banking system

7. 7 THE ICB AND AFTERMATH  Higher capital and liquidity  Ring-fencing: the “Big Idea”  Depositor preference  Switching/transparency for competition  No change to Verde  LBG least impacted of major UK banks (though not negligible)

8. 8 HOW MUCH DOES IT MATTER? WHAT ARE WE DOING ABOUT IT  Total reform package costs  One-off implementations£1-2bn for LBG  Ongoing costs+ £500m-£1bn p.a.  Capital/liquidity holding costs+40-70% = Lower ROE  Running harder to stand still  Making a Difference  Some wins (e.g. FSCS = £500m+ cost avoided for LBG)  But banks ‘will only regain respect when (a) taxpayer stake sold (b) balance sheet recession ends = regain our ‘licence to operate’ CLOSE CLINCH MULCH

9. 9 WHAT WILL CHANGE IN POLITICAL LANDSCAPE TO 2015?  “It’s (still) the economy, stupid”  Coalition friction 2013  Continued political fragmentation (Con/Lab share of vote 88% 1966, 75% 1979, 65% 2010)  Restructuring of the UK? (Scotland Referendum 2014)  Increased power of Local Government/elected Mayors  Will Labour find its vision (beyond ‘Not the Coalition’)  2015 outcome may be inconclusive

10. 10 HOW WILL OUR STRATEGY HELP? Start with what’s wrong  UK retail banking model high cost base  Supported by fat revenues from often complex, opaque products with high margins  Repeated compliance problems/misselling scandals  = Unsustainable - new model needed

11. 11 THE NEW MODEL  Low cost, efficient  Deliver with scale (large branch networks; investments in technology)  Multibrand (the importance of Halifax but also guerrilla brands like BM)  Simpler/transparent products  Remove misselling risk/multi-billion £ provisions  Lower margin but sustainable and profitable for long-term  = Happier customers = Repay the taxpayers’ investment

12. 12 CONCLUSION  Cost reduction not an end in itself  But an essential foundation for new, ethical and sustainable model  LBG possibly only major bank in UK that can do this  Stable, safe, profitable, responsible bank for industry, individuals, communities by 2015  That’s all folks  Questions?