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Lloyds' Narrow Moat Isn't Drying Up

We think it will hold up well against the threats of challenger banks and digital banking.

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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 (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.