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Is Lloyds share price a buy as price war with St James’s Place kicks off?

Lloyds [LLOY] and Schroders' [SDR] new wealth management business looks set to start a price war against its rivals when it launches in November. 

Undercutting the fees charged by market leader St James’s Place by roughly half, the new service, named Schroders Personal Wealth, comes at a time when Lloyds’ share price needs something to pull it out of the doldrums. 

 

 

Can Schroders Personal Wealth succeed?

Going after wealth managers like St James’s Place (SJP) on price is an aggressive move, but it hits them where they are most weak. High fees and staff perks, including luxury cruises, have damaged the reputation of wealth managers responsible for growing middle England’s money. 

According to the FT, customers who choose Schroders Personal Wealth will pay fees worth 3.65% of their total investment in their first year. This is much lower than SJP’s [STJ] 7.95% charge and Brewin Dolphin's 4.7%. Schroders Personal Wealth’s total fees will be roughly 1.9%, about half that of its two rivals.

Langcat director Mike Barrett thinks it makes sense for Lloyds and Schroders to compete on price given the industry's notoriously high prices. Yet success isn't a given. As Barrett told Portfolio Advisor:

“If you look at the demand side, clients have conclusively proven they are not price-sensitive, with SJP and [Hargreaves Lansdown] being the market leaders in the advised and direct channels.”

In the same article, Fundscape CEO Bella Caridade-Ferreira points to Lloyds’ captive audience as a distinct advantage:

“Lloyds already has a vast army of captive clients so it doesn’t need to spend money finding new clients, it can data mine its own client base to find thousands of clients with significant assets or large pots of money languishing in deposit accounts.”

According to Caridade-Ferreira, Schroders Personal Wealth is a "game changer" with the scale to further lower costs.

“Lloyds already has a vast army of captive clients so it doesn’t need to spend money finding new clients, it can data mine its own client base to find thousands of clients with significant assets or large pots of money languishing in deposit accounts” - Fundscape CEO Bella Caridade-Ferreira

 

Why is Lloyds doing this?

The short answer is to boost profits. While Lloyds has fared better than other banks recently, its focus has been on protecting margins rather than expanding. 

Getting into wealth management is a key part of its efforts to grow profits. The bank is hoping to grow assets under management from £13 billion to £25 billion within five years. With such a lofty target, Lloyds and Schroders need an aggressive strategy.

The new service will launch in November, having been pushed back to avoid clashing with Brexit.

£25billion

Lloyds' aim for assets under management within 5 years

Is Lloyds a ‘buy’?

Lloyds’ share price is up around 9% this year, trading around the 54p level. This is well off the 66.7p high seen in April, with the threat of Brexit and economic uncertainty weighing on the stock. 

However, since the start of September shares have rallied over 10%. Giving investors confidence is news that the bank can now start to offset PPI costs, and an increased chance that the UK will leave the EU with a deal. A cool down in the US-China trade war has also helped.

 

Market cap £37.611bn
PE ratio (TTM) 10.15
EPS (TTM) 5.30
Operating Margin (TTM) 33.29%

Lloyds share price vitals, Yahoo Finance, 24 September 2019

 

For income-seeking investors, the bank paid a 1.2p interim dividend in its half-year results, up 5% from the 2018 interim payout. Currently the stock carries a 5.87% forward yield and trades at 10.16x earnings (TTM).

Yet Goldman Sachs [GS] have downgraded Lloyds from "neutral" to "sell". Behind this decision were concerns the bank couldn't sustain momentum in its mortgage business.

But if the bank is able to take market share from St James’s Place and Hargreaves Lansdown [HL] from November, then the share price should see mid- to long-term growth.

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