Lloyds sees green shoots of recovery but waves goodbye to offices

Lloyds Banking Group PLC is betting the U.K. economy will be in better shape than it previously expected as it comes out of the coronavirus pandemic, citing the success of the ongoing vaccination program amid surging deposits, as it unveiled 2020 full-year results.

The bank said the relative economic stability of the last quarter of 2020 and the "remarkable" £39 billion growth in deposits over the year, which saw credit card balances fall £3.4 billion to £14.3 billion, meant it was now more positive than the assumptions in its models for expected credit losses and the broader outlook for the year ahead.

"Some of the news from the government as announced on Monday is somewhat more positive than expected, with a slightly earlier opening up of the national lockdown which hopefully will lend itself to consumer activity. Our assumptions for our expected credit losses and macroeconomic scenarios were a bit more conservative than what the government announced so we might see a little bit better performance in unsecured than we had initially expected," Lloyds CFO William Chalmers said.

Lloyds' mortgage balances were up £5.2 billion to £293.8 billion and Lloyds' outgoing CEO António Horta-Osório said the bank, which is the U.K.'s biggest mortgage provider, was positive about the outlook for the year ahead in the mortgage market, as mortgage-holders reacted to a new way of working.

"The mortgage market continues to be very strong since the first half of last year. It is not only pent-up demand relating to the stamp duty incentives, which are likely to be extended to ensure a smooth transition and no breaks on the chain but also because many home movers are moving houses based on their preferences given they now mostly work from home. They are moving to bigger houses outside cities and we clearly see a big increase in both first-time buyers and home movers," he said.

Incoming CEO Charlie Nunn will start in August.

The bank increased its open book of mortgages by £7.2 billion last year out of which £6.7 billion was in the last quarter of 2020. Hórta-Osório said Lloyds came into the end of the year with approved mortgages that will complete in the first quarter of about £14 billion or 50% above the level of December 2019.

Lloyds itself is taking a new look at its own real estate portfolio in a further blow to traditional financial centers in the U.K.

In its 2021 review, the bank aims to reduce its office space by 20% over the next three years including 8% in 2021. The bank already reduced its office footprint by 23% in its previous strategic review.

Chalmers said for 2021 the bank was aiming for a return on tangible equity of between 5% and 7%, up from 3.7% in 2020, citing the effectiveness of the vaccine rollout program as a potential variable factor in economic recovery.

"There is a degree of caution around the speed with which customer activity resumes. If we get more customer activity we'll be at the upper end of expectations, if we get less we'll be at the lower end," he said.

The second key factor affecting potential changes to 2021 expectations was impairments, said Chalmers, which stood at £4.2 billion in 2020.

"We are very well-provisioned for the uncertainties that lie ahead. We have our expected credit loss modeling and where we think that's come up short, because of the unusual circumstances, we have put in place management judgments on top of that. If it turns out that the macroeconomics do not unfold in the way that we have predicted then you would expect to see some implications for our impairments and releases associated with that," he said.