Executives believe Lloyds has an advantage over local rivals because it is the only lender that still operates a substantial insurance division © Bloomberg

Lloyds Bank is planning to extend its push into wealth management and insurance in its next strategy update, in an effort to diversify its sources of income as it braces for a long period of record-low interest rates.

The coronavirus crisis has increased the need to boost the “less interest-rate dependent” parts of its business after recent rate cuts slashed hundreds of millions of pounds from revenues across the sector, said people briefed on the UK lender’s strategic thinking.

Chief executive António Horta-Osório said before the pandemic hit the UK that Lloyds would begin work on a new strategy over the summer. People close to the bank said it was going ahead with this despite the initial disruption caused by the virus.

Lloyds is the UK’s largest high street bank, and some members of the board have expressed concerns the business is too “monoline” — meaning it relies too heavily on consumer banking in a single country, one of the people said.

However, executives believe Lloyds has an advantage over local rivals such as Royal Bank of Scotland because it is the only lender that still operates a substantial insurance division.

The Bank of England made two emergency rate cuts in March to help protect the economy from the impact of the Covid-19 pandemic, reducing its base rate from 0.75 per cent to a record low of 0.1 per cent.

Each 0.25 percentage point reduction knocks almost £150m from Lloyds’ annual net interest income. In contrast, revenue from its insurance and wealth division — which operates mainly under the Scottish Widows brand — is less affected by changes to interest rates.

Lloyds’ most recent strategic plan, which it outlined in 2018, already included moves to expand Scottish Widows, alongside efforts to increase lending to small companies and first-time home buyers. However, the unit is expected to play a more central role in its next three-year plan as lending margins are forecast to remain under pressure for the foreseeable future.

The wealth and insurance division generated underlying profit of £1.1bn in 2019, about 15 per cent of the group’s total. Lloyds has expanded in areas such as workplace pensions, including purchasing £19bn of assets from Zurich in 2018, but its market share remains much lower than in areas such as credit card lending and mortgages, where it controls more than 20 per cent of the UK market.

One of Lloyds’ top-10 shareholders echoed the concern on the board about the concentration risk of its current business model and said they would welcome further efforts in insurance and wealth: “They have the joint venture with Schroders and are trying to push more into the Scottish Widows business, so we would like to see more of that.”

Schroders Personal Wealth, a recently-launched joint venture that is chaired by Scottish Widows chief Antonio Lorenzo, has been on a hiring spree throughout the coronavirus crisis, in contrast to what amounts to a recruitment freeze across much of the financial services sector. The business launched late last year in an attempt to take on specialists such as St James’s Place, which Lloyds used to part-own.

The impact of coronavirus and the higher than expected cost of settling payment protection insurance mis-selling mean Lloyds is not expected to hit the ambitious profitability targets it set out in the 2018 plan. However, the bank made progress in its attempts to cut costs by digitising more of its operations.

Another person close to the bank said this trend had accelerated since the start of the pandemic as more customers turn to digital banking, and added that it would look to build on it further in the next plan. 

Lloyds declined to comment.

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