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Following are excerpts from a CNBC interview with Lloyds Banking Group CEO, António Horta-Osório, and CNBC's Nancy Hungerford.
NH: And I'm pleased to say we're about to get a view from another UK bank, joining me now is António Horta-Osório, the CEO of Lloyds Banking Group. Sir, it's a pleasure to have you on CNBC-,
AH: Good morning.
NH: Good morning to you. Well, we just heard from several European banking CEOs, and as you are domestically focused in the UK market, perhaps the biggest risk beyond your control, you might say, at the moment, is Brexit. I had the chance to speak to UK Secretary Liam Fox, Trade Secretary, that is, and he told me he's optimistic there is a deal, but when I asked him to put the odds of a deal being reached, he said it's similar to predicting the lottery. Does that worry you?
AH: Well, we are really the largest retail and commercial bank in the UK, as you said, the economy is performing in a very resilient manner, growing around 1.5%, and, of course, ahead of us, we have this uncertainty, with the 29th of March. I would share that opinion, that I think the most likely and desirable event is a sort of agreement, that avoids a cliff event on the 29th of March. That's what businesses, in general, want.
NH: And ever since we saw Theresa May's plan being voted down in parliament, we have seen investors buying up UK assets, even your share price has had an uptick, as well, it seems that investors think there will be a softer Brexit, they think that no deal is off the table. But do you think there is still significant Brexit discount in your share price?
AH: So, we have to bear in mind that no deal is still the legal default option-,
AH: I.e., if nothing happens, on the 29th of March, the UK leaves the European Union. I think you are right that there is a strong majority, as has been seen in parliament, against a no deal Brexit-,
AH: That majority has not yet tested what alternative they want, but it is clear that there is this very strong majority to avoiding a no deal Brexit, which is really important, I repeat, for UK businesses, and for the UK economy.
NH: Very important, but how much upside would you actually see in your share price, do you think, if that softer scenario is achieved?
AH: Well, that's really up to investors to judge-,
AH: What I can tell you is that the UK economy has been progressing well, in a very resilient way, growing 1.5%, with low impairments throughout the country. We just saw the latest numbers this week, employment in the UK is at the highest level ever-,
AH: With 140,000 more people working up to November, unemployment close to historical lows, GDP growing, so a good scenario, with a significant uncertainty ahead, and, as you saw, over the last 12 months-,
AH: All UK domestic stocks have been hammered, people have avoided UK domestic stocks as an asset class, and, of course, if this uncertainty is lifted, it's logical that investors will make up their minds, and they will go back, and invest back in to UK stocks, so that should be the case, if we have a deal before the 29th of March.
NH: What are you seeing in your mortgage business? Because a lot of attention, at the moment, is to what's happening with the UK housing market, in light of this uncertainty, and-,
NH: Just how bad things could get.
AH: Right. Well, we have, like, two mortgage markets in the-, in the UK, you have the London market, which is mostly cash transactions, high-value properties, and the rest of the country. And while in London, prices have been going down, and I would say significantly, over the last 12 to 18 months, in the rest of the country, house prices continue to rise at modest paces, and people are asking for mortgages, and we are doing more lending. So we have been shifting our strategy to support the remaining mortgages out of the UK, our mission and purpose, as a company, is to help Britain prosper, we have a 21% market share of overall mortgages in the UK, but that market share is only 16% in the London area, while it is around 23% in the rest of the country.
NH: Governor Mark Carney has said that if there is a no deal Brexit, a crash out scenario, that he may not be able to help, with the way of rates, in fact, he may have to actually hike rates. I mean, how damaging would that be?
AH: Yeah, Governor Carney said that, and he also said that he thought UK banks were extremely well prepared for a no deal possibility, and the stress test that was recently done on UK banks just show that.
AH: Of course, if you have a discontinuity, rates might have to go up, as you mentioned, and it will depend on the intensity, too, I think it's too-, too early to assess, also because I think that the most likely scenario, as I told you, is a sort of agreement, with a transition towards Brexit.
NH: When you talk about your mission to service UK customers, I mean, it does seem as though you are still, in some ways, paying for what happened in the financial crisis era. I mean, there's still a trust deficit, it seems, people concerned about overdraft fees, also even a call from an MP about your own resignation, related to a whistleblower scandal at the bank. What's your response to that, specifically?
AH: Well, I think it is correct that all banks have legacy issues of the past, we have a few related to the acquisition of HBOS, which was in 2008, so-,
AH: More than ten years ago. Our purpose, as Lloyds, and having acquired HBOS, of course, we take responsibility-,
AH: Is to put things right, redress customers, where they should be redressed, and continue to work to get people's trust. This is our motto. It's to help Britain prosper. If you look, for example, and you are mentioning small businesses-,
AH: Over the last eight years, according to Bank of England numbers, the sector, the lending to SME sector, has shrunk by £22 billion in the UK, and Lloyds alone has increased the lending to SMEs net by £8 million. Our market share, as a consequence, went from 13% to 19% of small businesses, and small businesses are the lifeblood of any economy, they make most of the employment, most of the exports, they-, they are the lifeblood of the economy, and that is one of our main priorities, as the largest retail and commercial bank in the country.
NH: Another legacy of the financial crisis, too, has been the greater scrutiny, as mentioned, coming from regulatory bodies, and when you look at the recent stress tests, Lloyds did rank among the three worst performers here, obviously still passing, but have you taken steps to address some of those concerns in those stress tests?
AH: Well, it was the-, it was the most severe stress test, over the last few years, and, as you said, absolutely concentrated on the UK, because the Bank of England, and rightly so-,
AH: Wanted to test banks for Brexit, and we are absolutely concentrated on the UK economy, that's why, as I told you, our motto is to help Britain prosper. So, we passed, under draconian assumptions-,
AH: Of the Bank of England, and that's why Governor Carney said that banks are all very well prepared, should the no deal Brexit alternative-,
AH: Come to be a reality.
NH: And when it comes to helping Britain prosper, I mean, we think about the employment outlook in the country, too, I mean, you're among banks who are digitalising, changing, making enormous changes, due to the technological factors in the industry, it does seem as though, on the employment level, you're talking about net adds, so far, as part of this transition, but these are jobs that are going away, not necessarily transitioning. What is-,
NH: Your message to employees out there, who are nervous that they might become obsolete?
AH: Well, Nancy, that is a really important point. We have announced a major investment, as part of our new three-year strategic plan, we have announced a £3 billion investment on technology and digital alone-,
AH: This is not including any other type of IT maintenance or regulatory investment, it's a 40% increase over the previous plan, and within that increase, we are increasing 50% the number of training hours on our own staff-,
AH: And the message to our staff is, as you said, many of the jobs of the future don't exist today, and they require skills that people don't have today, so we are massively investing in the training of our own people, so-, so that they have those jobs in the future, either inside the bank, or outside the bank. We are giving them the skills, for them to continue to be useful-,
AH: And have value added in this fourth digital revolution, which is increasing at a really, really fast pace.
NH: As part of that reskilling, though, can you rule out additional job cuts in the foreseeable future?
AH: I'm not ruling out-,
AH: It will depend on customer behaviour-,
AH: We have to serve our customers, and depending on the way they want to interact with us, we will need more or less people-,
AH: But we are, as I told you, to give you numbers, we have increased 600,000 hours of training last year, a 60% increase on the previous year, just on training our people-,
AH: To prepare them for the jobs of today, and especially for the skills they need for the jobs of the future.
NH: Mm. It certainly is a changing environment. Sir, thank you, it's been a real pleasure having you on CNBC, I appreciate your time this morning.
AH: Thank you.
NH: That is António Horta-Osório, the CEO of Lloyds Banking Group, with us.