Challenger Banks Don't Threaten Lloyds

Despite branch closures, there is strong evidence that Lloyds’ competitive advantages remain firmly intact in the face of the increasing importance of digital banking

Erin Davis 11 December, 2014 | 3:00PM
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Lloyds Banking Group (LLOY) recently 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 provided Lloyds’ dominant branch network in the UK. And this challenge comes at the same time that regulators are intensifying their efforts to increase competition in the retail banking market by lowering barriers to entry for challenger banks. In our opinion, there is strong evidence that Lloyds’ competitive advantages remain firmly intact and will remain so: we continue to see branch networks as central to retail banks’ ability to attract customers – and, critically, their deposits – and we see Lloyds’ shares as an attractive play on the improving UK economy.

At Morningstar, we think of competitive advantages in terms of ‘moats’, or sustainable competitive advantages that allow a company to generate positive economic profits for the benefits of its owners for an extended period of time.

We see the cost advantage created by low-cost deposit funding as the primary source of moats in retail and commercial banking. Around the world, licensed banks have unique access to low-cost and sometimes no-cost funding in the form of customer deposits. Customers are willing to lend money to their bank (in the form of deposits) in part because they value the liquidity that current accounts offer, but also because of the explicit (as in the E.U., UK and U.S.) or implicit government promise that the funds will be safe even if the bank becomes insolvent. Access to this type of funding is critical to banks’ ability to offer loans at affordable prices, and prices well below those of companies that must rely on wholesale funding.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Barclays PLC186.66 GBP0.00Rating
HSBC Holdings PLC429.70 GBP0.00Rating
Lloyds Banking Group PLC46.48 GBP0.00Rating
NatWest Group PLC216.80 GBP0.00Rating

About Author

Erin Davis  is a senior banking analyst for Morningstar.