Lloyds has suffered a “sting in the tail” for its broken contract with Standard Life Aberdeen over a £109bn mandate with its latest results revealing costs are due to cost in the hundreds of millions.
The bank’s Q2 2019 update did not reveal the exact amount set aside instead lumping it into a one-off £339m charge for “adverse movements in banking volatility and an estimated charge for exiting the Standard Life Aberdeen investment management agreement”.
In March, an arbitration panel ruled in favour of Standard Life Aberdeen over Lloyds’ decision in February 2018 to terminate an investment management contract due to come to an end in 2022. It instead handed £30bn of the contract to Blackrock to run in passive accounts and the remaining sum to be handed to Schroders with which it is also launching a wealth management joint venture.
A large sum for ‘three years of impatience’
Gavin Fielding, editorial director at Fundscape, described the £339m volatility charge as a “management euphemism”. “It is compensation for a poorly thought through break clause.”
Fielding said Lloyds could have stayed in the contract until 2022 “but for whatever reason have decided that it is untenable”. “It is a lot for three years of impatience.” An additional charge of £100m was taken for Payment Protection Insurance (PPI) in the first quarter of 2019 reflecting increased costs from higher gross complaint volumes.
Lloyds had enjoyed decent profits and cash generation but lost it to one-off items like the Standard Life Aberdeen contract and PPI, he said. “Lloyds must reckon they can get a better deal by doing it with somebody else, I’m sure they will have something lined by to maximise profit in the long term.” It reported an 8% increase in underlying profit to £2.2bn in Q1 but statutory profit before tax remained flat.
He reckons Standard Life Aberdeen would feel vindicated over the charge to Lloyds but said it could have longer-term implications. “Firms doing institutional deals with SLA may be a bit more wary of their sharp pencilled lawyers.”
Schroders JV already starts to pay off
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the firm’s decision to terminate its business with Standard Life Aberdeen is “costing the bank a pretty penny” and is a “sting in the tail”. However, Khalaf said ignoring one off items, the core business remains in good shape. “Costs continue to fall, and that’s largely driven a rise in underlying profits.”
The Bank of England has also “thrown Lloyds a bone” by reducing its capital requirements, which gives the bank a bit more wriggle room and may increase its propensity to make shareholder pay-outs this year.
He said: “Lloyds is therefore looking to its other activities to keep the top line heading in the right direction. That probably explains why it was so keen to shunt assets across from Standard Life Aberdeen to its new joint venture with Schroders, as part of its efforts to diversify the business and grow its income streams.
“Indeed while that decision looks like it’s going to cost Lloyds a few hundred million upfront, it’s already contributed £136m to the bank’s revenues in the first quarter.” The Q1 update reported “other income” increased by 7% including a £136m benefit in insurance and wealth from the” planned change in investment management provider”.
