Lloyds Banking Group’s (LSE:LLOY) main business can be simplified to taking in customer deposits through Halifax, Bank of Scotland and Lloyds and then lending that money out, mostly for people buying houses but also for credit cards, unsecured personal loans, for buying cars, for businesses.
At any one time it has about £410bn - £450bn of customer deposits and it lends to customers about the same – see Figure 1. Note the stability over time in both deposits and loans granted.
The pie chart – Figure 2 – shows that the majority of the money owed to Lloyds, Halifax and BoS is in the form of ultra-safe and secure mortgages.
An important metric used to assess banks is the proportion of its lending that is financed through deposits rather than by the bank borrowing money in the financial markets (going for “wholesale funding”).
In the case of Lloyds Group loans to customers are pretty well entirely financed from deposits: Its “loan to deposit ratio” was 107% in 2019 and 98% in 2020.
This is good. Funding a substantial amount from financial markets leaves a bank vulnerable to the market suddenly drying up in times of stress. Ordinary people’s deposit money is a much more reliable source.
Lloyds does borrow some money from the financial markets, and does have some exposure to derivatives, but this is relatively small and offset by financial assets such as bonds, derivatives and cash.
Figure 3 shows the ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
Prof. Glen Arnold
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