Lloyds/HBOS: the shotgun wedding years in the making
Why Daniels’ transformational deal was waiting to happen
Eric Daniels, Lloyds TSB’s much-travelled chief executive, has told at least two newspapers and one shareholders’ meeting that you don’t buy a new pair of shoes just because it is cheap. But when you’ve been coveting that pair of shoes for months, and when its price has been slashed by 80% or so, you need to be parsimonious in the extreme to walk on by.
It is difficult to overstate how much the stars seemed to be smiling on Lloyds TSB when it – and the short-sellers – pushed HBOS’s shares into bargain-basement territory. Long regarded as fabulously dull, by the middle of the summer Lloyds TSB was also looking like the bank that had dithered while others had acted decisively to snap up assets in the industry’s sale of the century.
Of course Lloyds had benefited from its boring approach: it had avoided many of the expensive pitfalls that its rivals had fallen into. Back in the 1990s, under Brian Pitman, it was the poster-boy of retail and commercial banking, maintaining a triple-A rating and throwing off profits and capital that critics said it could not properly deploy.
Ten years later, and having suffered withering criticism for missing out on the windfall of the credit boom, Lloyds was in vogue again. Although, as the chief executive of one UK high street rival told Euromoney earlier this year: "It is not clear whether Lloyds is a success again because of a deliberate strategy or simple inertia."
But the problem with Lloyds remained the same – to extend the Daniels analogy, it was looking increasingly like a bank that is happy to rely on a very limited choice of footwear. Few would have suggested that the shoes in question were anything other than a well-crafted and sensible pair of hand-stitched brogues capable of withstanding the roughest weather. That much has been clear enough from the results that the bank has been turning in since Daniels took up his position at the helm of Lloyds TSB five years ago. The footwear did, however, remain remorselessly British.
According to Lloyds’ acting finance director, Tim Tookey, the strength of the bank’s core business in the first half of 2008 has been a natural consequence of Lloyds’ focus on relationship-building and organic growth. "One of the things that sets us apart from others is that we are totally relationship-based," he said, talking to Euromoney in August. "We are at the opposite end of the spectrum from the biggest investment banks that build relationships in order to do jumbo transactions that are few and far between. Our approach is to do lots and lots of transactions with our customer base in order to build long-term relationships."
That strategy, said Tookey, has already been bearing fruit in the UK retail banking market. "In a period of considerable market turbulence for the financial services sector we delivered another strong performance in the first half of the year," he said. "Our retail banking business saw its profitability rise by 15%, and that demonstrates the benefit of the shift we made two or three years ago when we moved our business model towards building our income around our liabilities. In other words, the focus has been on attracting savings balances into the retail bank to generate increased income, rather than being purely dependent on growing the business through lending."
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"I certainly don’t see our lack of geographical diversification as a weakness. I see the diversified nature of our UK business as a strength."
Tim Tookey, Lloyds TSB |
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Until very recently that still left phase three of the Lloyds TSB game-plan (see box), which envisaged using its financial strength to explore new opportunities, perhaps in new markets. Surely a large-scale acquisition, either in the UK or better still in another market where Lloyds has no presence at all, would provide a ready-made customer base where the relationship-building model could be replicated? Surely potential acquisition targets were now available at once-in-a-lifetime prices? And surely Lloyds TSB’s balance sheet and capital base were strong enough to allow it to make a large-scale acquisition without necessarily hammering its unusually strong credit ratings?
These questions are ones that the bank’s senior management was being asked with increasing frequency, especially given that it sailed through the credit crisis relatively unscathed, and with its Aaa rating from Moody’s intact. When the question was posed at the bank’s results presentation in February, the answers were market-moving. "Are there opportunities today that there weren’t 12 months ago?" said the bank’s chairman, Victor Blank. "The answer has to be, look at the pricing of assets around the place; the answer to that has to be yes." At the same time, he said that Lloyds TSB would need to maintain the "strength and headroom to take advantage of opportunities".
The chairman qualified that observation by insisting "we’re not rushing out to take advantage of inorganic opportunities". But his comments – made on Friday February 22 – were interpreted by some commentators as the principal reason why Alliance & Leicester shares rose by 9% at start of trading the following Monday. Given that Lloyds TSB’s interest in Northern Rock, albeit if the government gave support, had been an open secret, it was generally assumed that when assets such as Alliance & Leicester or Bradford & Bingley came into play, Lloyds TSB would be at or near the front of the queue.
Decline reversed
Similar assumptions were swirling around Frankfurt exactly four months later when shares in Germany’s largest retail bank, Postbank, surged by 7% in a session on talks of an imminent bid from Lloyds TSB. Those rumours followed hot on the heels of others that had suggested that the UK bank had offered Scottish Widows’ life insurance business to Allianz in exchange for Dresdner Bank’s retail operations.