Lloyds TSB is faced by a dilemma competitors would love to have to handle: how to remain the developed world's most profitable retail bank. Peter Ellwood, the group's workaholic chief executive officer, has some well-honed ideas on this task. Rival banks would do well to heed his strategy, otherwise they might become part of the solution: even after spending more than £6 billion acquiring Scottish Widows, Lloyds TSB is still on the prowl.
"Our governing objective is to maximize shareholder value and we measure our success by doubling shareholder returns every three years," says Ellwood. This is set in stone and Ellwood is not persuaded by the argument that HSBC, which has copied Lloyds TSB's success strategy, is aiming to achieve the same objective on a five-year basis. "It is important to keep this three-year target before us," he says. "But it's more likely that it can be done through mergers and acquisitions than simply by organic growth. For a group that is worth some £ billion to double shareholder returns every three years organically will become increasingly difficult. To take a company and make it £90 billion and £180 billion and so on simply organically is not something that can be done over the long haul."
The secret of my success
Ellwood is convinced that a key reason for Lloyds TSB's success is its focused strategy. Maximizing shareholder value is something the world's best companies are doing largely by acquisition, he argues. "We've looked at a variety of different ways to maximize shareholder value and so far we haven't come up with a better way than by doubling shareholder returns every three years," he says. "This is something we've done over the last 15 years or so, helped very considerably by the merger with TSB in 1995."
The bank defines shareholder value as share-price appreciation plus dividend payment. It started looking at this concept when Brian Pitman became chief executive in 1983, at a time when few UK companies talked shareholder value. "You create shareholder value when you make a penny more than your cost of equity," says Lloyds TSB's finance director, Kent Atkinson. "But after a year or two we began to realize that perhaps there is an alternative strategy that could make us two pennies more than the cost of equity, or even a third strategy that could make us three pennies more. We began to understand the difference between maximizing shareholder value as opposed to merely creating shareholder value. So the governing objective was changed from simply creating shareholder value to maximizing it." Atkinson says this made a fundamental difference to behaviour in the company. "If all business units are creating value, under the first governing objective that would have been considered satisfactory," he says. "But if the objective is to maximize shareholder value it is not enough. Under Lloyds TSB's governing objective to maximize shareholder value, management is constantly looking at all business units."
Lloyds TSB has laid down three strategic aims behind the governing objective, and these are critical to how the bank is managed day to-day. The first is to be a leader in its chosen markets. This means that if it's eighth or ninth in a market it exits from it. "The reason why we've disposed of some 14 businesses since the TSB merger is because we didn't wish to be a leader in these areas," he says. For instance, trying to become a leader in German investment banking didn't fit with the bank's objectives, so it sold subsidiary Schröder Münchmeyer Hengst to UBS for £100 million. It also had a direct mortgage business called Mortgage Express that was sold because Lloyds TSB didn't want to be in that particular part of the mortgage business.
The same principle applies to acquisitions. This was the reason for the purchase of Countrywide Bank in New Zealand, which moved Lloyds TSB up from fourth position in market terms to second. This is also very much the rationale for the Scottish Widows transaction, which places Lloyds TSB second behind Prudential in the UK life insurance and pensions markets.
"The second strategic aim is really very exciting because it's where the future growth is going to come from," says Ellwood. "It's about being first choice for our customers by understanding and meeting their needs more effectively than anybody else. We are trying to get to a situation where we treat the customer on an individual basis, and it's about segmentation and customer-relationship management. We've still only got a minority of our customers' total financial products. They have on average about six products but only just over two with us. This means we need to have very competitive products and excellent service."
The third plank concerns driving down day-to-day operating costs to be able to afford to reinvest in the business. Lloyds TSB said four years ago when it merged with TSB that by the end of 1999 it would have taken £400 million a year off the cost base of the organization. "We're on track to achieve that by the end of this year," says Ellwood. "In real terms that's about £700 million a year, and it basically takes our cost base down from £10 million a day to £9 million."
The strategy rolls out from governing objective to strategic aims, and from there it moves on to the goal of becoming a world-class player in critical areas. "We are living in a global environment where Citigroup, for instance, has said that by 2010 they want one billion customers," says Ellwood. "It is an environment of greater consolidation, and we therefore have to measure ourselves in a world-class way in certain critical areas." Ellwood wants world-class status in three areas: customer relationship management, the way in which it manages its near 80,000 staff, and how it manages change. On the latter, at any one time there are more than 100 major projects running in the group and Ellwood's priority is to be on top of them, making sure they're running on time and to budget. "We've done some global benchmarking in all three areas and broadly speaking we've come out pretty well, but there's more to be done," he says.