Lloyds' Narrow Moat Isn't Drying Up
We think it will hold up well against the threats of challenger banks and digital banking.
With its third-quarter results, Lloyds Banking Group (LYG) announced that it plans to close 200 branches as its customers increasingly embrace digital banking platforms. This brings to the forefront the question of whether the increasing importance of digital banking will reduce the competitive advantage of Lloyds' dominant branch network in the United Kingdom. Digital-only banks have the potential for a large cost advantage over traditional banks by avoiding the expense associated with maintaining branches. However, we find that pricing does not drive consumers' banking decisions, and the rise of digital banking platforms has not meant that retail customers are ready to forsake branches. Instead, consumer decisions continue to be driven by branch locations, and it will be difficult for challenger banks to win market share by offering cheaper pricing or better customer service. As a result, we think Lloyds' branch network and the strength of its brands will continue to be key competitive advantages over the next decade.
Assessing Moats in U.K. Retail Banking
Two (Lloyds and HSBC (HSBC)) of the four U.K. retail banks we cover have narrow Morningstar Economic Moat Ratings, and the other two ( Royal Bank of Scotland (RBS) and Barclays (BCS)) have the potential to gain them as they shrink the other more troubled parts of their business, in our opinion. In fact, we see the U.K. retail banking market as naturally moaty, at least for established players. The country's deep supply of low-cost deposits has allowed established banks to build moaty business by keep funding costs low, a competitive advantage that is buffeted by other factors like the U.K.'s concentrated banking market, customer stickiness, and regulatory barriers to entry.
Erin Davis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.