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Lloyds to ramp up focus on digitization with £3B investment

Lloyds Banking Group Plc is investing £3 billion in technology in a bid to defend its market position following the introduction of rules allowing competitors access to banks' customer data, according to CEO António Horta-Osório.

The bank will upgrade its technology over a three-year period, with the aim of cutting costs while making banking "simpler and easier" for customers, Horta-Osório told analysts after the lender announced a jump in 2017 profits. The Open Banking legislation came into force in the U.K. on Jan. 13, requiring banks to allow third parties such as fintechs to access customer data.

"We want to remain the number one digital bank in the U.K. with Open Banking functionality," he said. "We are the only large U.K. bank that complied with the Open Banking implementation deadline earlier in the year."

Lloyds will offer a greater number of personalized products and services to meet changing consumer tastes, and will make greater use of customer data, he said, adding that the lender currently "meets 68% of customers' banking needs online."

Profit boost and PPI worries

Lloyds announced its strategy as it reported statutory profit before tax of £5.28 billion for full year 2017, up from £4.24 billion in 2016, though it missed FactSet's consensus estimate of £5.9 billion. Nevertheless, the 24% boost in statutory pretax profit prompted a 2.45% rise in its share price to £69.51 as of 12.58 p.m. in London on Feb. 21.

The bank paid out a further £600 million in the fourth quarter of 2017 for mis-selling of payment protection insurance (PPI), reflecting an uptick in the number of average weekly complaints to 11,000 from 9,000 for the first nine months of the year.

CFO George Culmer warned analysts during the earnings call that Lloyds was likely to face a slew of further PPI claims in the wake of a public advertising campaign launched by the U.K. Financial Conduct Authority in August 2017, which urges affected consumers to make their claims before an Aug. 29, 2019 deadline.

"There will be increased publicity [from the FCA]," he said. "We will remain susceptible to whatever comes through the door."

--[/However, Horta-Osório said 2017 had been a "landmark" year for the bank, which was returned to full private ownership in May following its £20.3 billion bailout by the government at the height of the global financial crisis in 2008.

The CEO highlighted that MBNA Ltd., a credit card business with an £8 billion portfolio that Lloyds acquired in June 2017, is performing "ahead of expectations." Responding to an analyst question about the possibility of further acquisitions similar to MBNA, he said the bank would focus on organic growth but might consider M&A if it found the right target.

'A lot to like'

HSBC is "positively exposed" to the hike in interest rates that is widely expected later this year, Horta-Osório added.

The Bank of England's Monetary Policy Committee left the key rate unchanged at 0.5% at its February meeting, after an increase from 0.25% in November 2017. But more hawkish messages suggest that a further rise could happen as early as May.

HSBC boosted its ordinary dividend by 20% to 3.05 pence per share for 2017. Lloyds' fully loaded and transitional common equity Tier 1 ratios were 14.1% at the end of 2017, up from 13.6% a year earlier.

"There's a lot to like in Lloyds' numbers, with profits rising, costs under control, and prodigious amounts of cash being thrown off to shareholders," Laith Khalaf, senior analyst at stockbrokers Hargreaves Lansdown, said in a Feb. 21 note.

"The Bank of England can take its fair share of credit for Lloyds' profits, as rising interest rates have delivered a boost to the top line," he added. "For the banking industry, the prospect of rising rates after a decade of loose monetary policy is a bit like finally coming across an oasis in the middle of the desert. With more rate rises waiting in the wings, this looks like a tailwind that's going to be blowing behind Lloyds for the foreseeable future."