Antonio Horta-Osorio, Lloyds Banking Group

1 December 2014

The UK’s “forgotten army” of medium-sized businesses has the full support of Lloyds Banking Group, but its chief executive argues that many of them need to be more ambitious.

“A healthy economy needs healthy banks,” says Lloyds Banking Group’s António Horta-Osório. But that also works the other way around – and the chief executive of the UK’s largest bank believes that medium-sized businesses (MSBs) have a significant role to play in delivering a sustainable recovery. 

“They may not individually have the same brand recognition that many larger businesses enjoy. But they do punch above their weight when it comes to the contribution they are making to UK GDP and employment,” he explains. “We should not underestimate the potential of medium-sized businesses to make an even more significant contribution to the UK economy in the years ahead.”

Speaking as co-host of the CBI’s first MSB Summit, he adds that the event is a “small demonstration of the bank’s commitment to help businesses succeed”.

He is also quick to recognise that it will take actions, rather than words, to help the banks regain the trust of their customers and stakeholders. 

Some of the measures Lloyds has taken are those you’d expect from a bank part-owned by the taxpayer – it was the first to access the government’s Funding for Lending scheme, for example. But Horta-Osório adds that Lloyds has used it more than any other bank, and is also approving more than 90 per cent of loan applications from medium-sized businesses (which it classes as those with revenues of between £25m and £750m). 

In fact, he says, Lloyds has increased its net lending to MSBs by 8 per cent this year in a market that is shrinking by 4 per cent. At the same time, it has increased the number of MSBs it has a relationship with by 5 per cent. Horta-Osório promises an additional £3bn in net lending to MSBs over the coming three years. “I hope that goes a long way to help the UK prosper,” he says. ~

And in response to the challenge that businesses of this size are still not getting the support they need, he pledges: “I can promise that we are committed to hearing every case.” 

Lloyds Bank has a charter for MSBs (as well as a SME charter that will be renewed in the new year) built on its relationship-led approach, its pledge to make 95 per cent of credit decisions locally and a switcher promise to make it “quick, easy and economic” to change banks. Its growth in customers has, no doubt, been helped by larger teams in regions including the South Midlands and Hertfordshire, and investment in new business teams in London and around the country.

Horta-Osório also emphasises the bank’s exclusive UK focus. It has rowed back from its international operations, selling off its Spanish retail and international private banking operations last year, for example, as the chief executive has set his stall on making the banking group stronger, simpler, “low cost and low risk”. 

And by focusing on UK retail and commercial banking, he says it’s easier to understand what customers want and need. For all the international comparisons, particularly with Germany’s support of its Mittelstand, he argues that “the solution to harnessing the maximum potential of the UK’s medium-sized businesses will be unique to the UK and take account of the particular characteristics of our economy”.

Playing its part

But the banking group has also made more unusual moves in support of smaller British businesses. In October, it unveiled a £50m private equity fund to support small and medium-sized housebuilders, which Horta-Osório hopes will add vitality to the sector and help drive the development of financial skills and ambition within it – as well as doing something to address the current housing shortage. 

Lloyds Bank is also sponsoring the Advanced Manufacturing Training Centre at the Manufacturing Technology Centre, Coventry, to the tune of £1m a year. The centre is set to open in 2015, with more than 250 engineering apprenticeships and trainees graduating each year, accredited by the Institution of Mechanical Engineers. 

We are committed to providing manufacturing businesses with access to finance and competitive rates of funding

“By training the next generation of engineers in the UK, the Lloyds Bank Advanced Manufacturing Training Centre will help address the skills gap – which is one of the main barriers to growth that the sector currently faces,” says Horta-Osório.

And continuing his focus on the manufacturing sector – one he sees as crucial to rebalancing the UK’s economy – he explains that the bank has also worked with the University of Warwick Manufacturing Group to train 200 relationship managers, so it can better serve the sector. 

“We are committed to providing manufacturing businesses with access to finance and competitive rates of funding,” he adds. In the first nine months of 2014, Lloyds lent over £925m to the sector – putting it on track to achieve its target of lending £1bn a year, for this year and the next three. 

But rebalancing will also require businesses to be more outward-looking and ambitious in seeking new export markets, Horta-Osório adds. And in August, Lloyds Bank research found that 58 per cent of mid-sized firms weren’t exporting, and 7 per cent planned to do so within the next five years – although three-quarters of them said they knew the benefits. Instead, more cautiously, they chose to focus on cutting costs and increasing productivity at home.

Digital efficiency

But there, Lloyds has something in common with many of its business customers. Just over a month ago, Horta-Osório announced a new strategy for the bank, which will involve closing a net total of 150 branches, investing £1.6bn in digital services and increased automation and driving efficiency across its services. 

“We must continue to shape our offering around customer needs – and not the other way around,” he explains. “Customers’ increasing adoption of technological change is only going to increase the demands they place on their bank.”

And for MSBs in particular, they’ll have access to a new, tailored internet banking offering in 2015, which Andrew Connors, head of mid-sized business at Lloyds Bank says will “help them become more efficient and make it easier for them to transact globally”. He expects greater use of digital channels, as well as increased functionality. Already mobile is Lloyds Bank’s fastest growing channel. Its business banking mobile app, for example, gives businesses the ability to control their money on the move. And the frequency of contact with the customers that use it is far higher than those that don’t. 

The company is certainly throwing its weight behind the digital shift. Lloyds Banking Group was a founding partner of the UK’s Digital Skills Alliance, Go ON UK, and, more recently, has been appointed to drive a government initiative to increase the digital capability of SMEs and charities across the UK. The bank’s own research has shown that as many of 1.7 million organisations in the UK have a very low level of skills in this area, with only half having a website and nearly a third stating that the internet wasn’t relevant to their business or charity. Of those that did have a website, only one in five allowed payments or donations via their site. 

It also explains Lloyds Bank’s workshop session at the MSB Summit: “Seizing the digital opportunity”, led by Sean Gilchrist, managing director, global digital channels, Lloyds Bank Commercial Banking. He was clear about the challenges that face Lloyds shifting to new ways of working, but that it was willing to learn, adapt and enhance what it offered as it went along. “Digital has to start from the top in any business,” he said.

MSB Summit

Despite the economy, 51 per cent of MSBs managed to post growth of 10 per cent or more each year for the past three years – and more than 80 per cent are confident of growth in their businesses over the next five years. That’s according to CBI research launched to coincide with the MSB Summit. 

Yet, three years on from the CBI’s Future Champions report, CBI director-general John Cridland argued that the “forgotten army” was still not getting the focus and support they need to really realise their potential. 

He called for wider finance options to include a private placement market for MSBs, a larger late-stage venture capital market and reform of capital gains tax to incentivise long-term equity investments. He also argued that MSBs and “scale-up Britain” should be given much more attention in their own right than the start-up focus emphasised by the term SME. 

Minister of State for business and enterprise Matthew Hancock agreed with the difference: “People talk about small businesses being the lifeblood of the economy. I say that they are. And if they are then medium-sized businesses are its beating heart.”

Referring to the British Business Bank, procurement reforms, the Red Tape Challenge and support through UK Trade & Investment (UKTI) and UK Export Finance, he assured the members of the audience that MSBs were part of the government’s long-term plan to create a strong, sustainable and balanced economy. 

The rest of the summit was designed to offer useful insight for growing businesses. There were workshops from each of the event partners (Lloyds Bank, BDO, Grant Thornton and Standard and Poor’s) on digital, access to finance, exports and long-term business planning. Rita Clifton, chair of Populus, highlighted the importance of brand building – and having ambition in doing so. A panel session, including The Alchemists’ CEO Lucy Armstrong, Buddi CEO Sara Murray and Mike Wright, professor of entrepreneurship at Imperial College, discussed why it’s good to take risks and to fail. And Daisy Group CEO Matthew Riley spoke of his experience in growing the communications company. 

His advice was straightforward as he emphasised the need to understand the market you operate in; plan for growth, while keeping it flexible; finding the right people and developing them; and getting the best advisers, suitable for each stage of the journey.

“MSBs generate a third of private sector turnover in the UK and access to finance continues to be a challenge. A lively debate showed that traditional debt still seems to dominate the balance sheets of MSBs. The need for a real relationship with the bank provider was seen as key. Alternative sources are slowly seeping into the marketplace but the take up of Regional Growth Fund or UKEF financial support needs to improve to drive local output and export growth.” 
Kevin Cook, partner, BDO

“It was clear that the mid-market companies attending the event were very focused on how to move their businesses forward and address the challenges of achieving growth. This showed through at Standard & Poor’s session on long-term planning, as there was a high level of engagement from the audience and a willingness to openly discuss real-life issues they are currently facing.”
Roberto Rivero, vice president, head of market development, Standard & Poor’s

“MSBs are the key agents of growth in the UK, so we were delighted to bring government, advisers and experienced internationalised MSBs together to share insights on success overseas. Key takeaways included having the right partners; using all your networks; getting help wherever you can, including UKTI and UKEF; real face-time beats Facetime; and language need not be a barrier.” 
Simon Bevan, partner, Grant Thornton UK