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Lloyds and HSBC are investing in the space, will Barclays and Natwest follow suit?
Thursday 19 Aug 2021 Author: Mark Gardner

The recent UK banks reporting season was characterised by consensus beating results and the resumption of dividends.

However the sectors’ earnings were flattered by larger than expected net provision releases. These provisions related to money put aside to cover potential bad debts during the pandemic, and it has been a recurrent feature throughout the banks reporting season.

Many banks found that they were too cautious during the crisis and have been releasing some of the potential bad debt provisions, justified on the basis of an improving macro-economic environment.

Nonetheless, it is important to acknowledge that these are exceptional items and are one-off in nature. The outlook for the UK banks sector is far less rosy than the consensus beating earning headlines would indicate.

The sector faces a structural challenge from the anaemic returns on lending. In response to this Lloyds (LLOY) and HSBC (HSBA) have sought to increase their presence within the wealth management sector. Looking forward NatWest (NWG), and Barclays (BARC) may be forced to follow suit or risk languishing in a strategic quagmire.

Weak returns from lending are a direct result of low interest rates which have compressed the group’s net interest margins (the difference between the rate at which a bank can fund its lending and the amount it charges borrowers).

Given the prospect of a continued low interest rate environment, Lloyds’ recently announced £390 million acquisition of wealth manager Embark looks decidedly prescient.

Embark Group is a fast growing investment and retirement platform business. The deal bolsters Lloyd’s position within the wealth management segment and brings 410,000 customers and £35 billion of assets under management.

Lloyds is targeting a top three position in direct to consumer self-directed and    robo-advice in the medium term. In addition it is aiming for a top three position in the individual pensions and retirement drawdown market by 2025.

HSBC is following a similar strategy to Lloyds, although its “pivot to Asia” strategy means that it has a different geographic focus. HSBC intends to become the leading wealth manager in Asia in approximately five years.

This ambition has been reflected in the group’s decision to invest approximately $3.5 billion in its wealth management operations over the next five years. HSBC is on track to create over 1,000 roles in its wealth management business in Asia by the end of this year.

HSBC benefits from its dominant position in Hong Kong. Group profit form Asian wealth and private banking reached $5.1 billion last year. Moving forward a continuing wealth management connection between the mainland and Hong will help.

Lloyds and HSBC have clear first move advantages with respect to diversifying into the wealth management segment. It will be interesting to see if either NatWest or Barclays decide to   follow suit. [MGar]

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