In the immediate aftermath of the Brexit vote, it has become clear that banks all over the world are going to find it harder to increase profitability going forward.
Indeed, following the referendum outcome, interest rates on bonds have collapsed, making it harder for banks to earn a return on their capital reserves while speculation that the Bank of England will move to cut interest rates further is likely to put pressure on net interest margins across the sector.
Lloyds (LSE: LLOY) is more exposed to domestic post-Brexit economic problems than most of its large domestic peers. You see, Lloyds’ international exposure is limited, which means that the bank’s fortunes are tied to Britain’s economic success.
And in an attempt to neutralise any negative side effects from Brexit, Lloyds’ management has acted quickly to try and prepare the lender for economic turmoil. According to the Financial Times, which cites people with knowledge of the matter, Lloyds has decided to accelerate its cost-cutting efforts in the wake of Brexit.
Slashing costs
Back in October 2014, Lloyds announced that it was planning to cut £1bn from its cost base by the end of 2017. However, as revenue growth slows and Lloyds looks for additional ways to boost its net income, the bank is now accelerating its cost-cutting plan, targeting an extra 20% in savings by the end of 2017. These additional savings will take the total annualised cost reductions to about £1.2bn. As part of this transformation it’s estimated 1,800 jobs could be lost and an additional 40 branches closed.
Unfortunately, for employees, this might not be the end of Lloyds’ restructuring. One group of City analysts believe that Lloyds could close up to 30% of its branch network as consumer preferences change and services move online.
Post-Brexit change
Actions to cut costs from Lloyds are a great response to Brexit uncertainty, but it’s unlikely this will be the last post-Brexit change made by the company.
Lloyds is now facing a very uncertain future. While it’s not yet clear how Brexit will impact the UK’s economy, it’s clear that lower interest rates will dent Lloyds’ profitability. Moreover, as the UK’s largest mortgage lender, Lloyds is extremely exposed to the UK property market, and any fall in property prices will reverberate through the bank’s balance sheet.
Still, the majority of economic data releases hint that it’s business as usual for the UK’s economy following Brexit. So, as of yet, there’s little reason to be concerned about Lloyds’ outlook. That being said, only time will tell if the UK’s decision to leave the European Union will have any significant impact on the country’s economy. It’s this period of uncertainty that will worry investors.
Overall, even though Lloyds has acted quickly to curb Brexit fallout until risks to the UK’s economy are clear, it may be best for investors to avoid the bank.
