Lloyds to Pay 4% Dividend

We see Lloyds as the most attractive play on the U.K. banking market because of its positioning, improving financial results, and attractive valuation

Erin Davis 27 November, 2014 | 11:43AM
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With its third-quarter results, Lloyds Banking Group (LLOY) announced that it plans to close 200 branches as its customers increasingly embrace digital banking platforms. This brings to the forefront the question of whether the increasing importance of digital banking will reduce the competitive advantage of Lloyds' dominant branch network in the U.K. Digital-only banks have the potential for a large cost advantage over traditional banks by avoiding the expense associated with maintaining branches.

However, we find that pricing does not drive consumers' banking decisions, and the rise of digital banking platforms has not meant that retail customers are ready to forsake branches. Instead, consumer decisions continue to be driven by branch location, and it will be difficult for challenger banks to win market share by offering cheaper pricing or better customer service. As a result, we think Lloyds' branch network and the strength of its brands will continue to be key competitive advantages for the bank over the next decade.

The U.K. banking market naturally lends itself to moats in retail banking. It is highly concentrated—the big four control 75% of the market—and challenger banks have made little progress in gaining share.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Barclays PLC174.92 GBX-4.27Rating
HSBC Holdings PLC361.70 GBX-3.82Rating
Lloyds Banking Group PLC43.15 GBX-4.22Rating

About Author

Erin Davis  is a senior banking analyst for Morningstar.

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