Abigail with attitude: Horta-Osório’s road to success a queasy journey for shareholders

Abigail Hofman
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The 2013 Euromoney Awards for excellence dinner, held in early July, was a glittering affair. Finally, it seems, the tide might have turned in the financial industry. The room was thronged and financiers had travelled from Africa, Albania and even supposedly impoverished Greece to attend the event. The guest speaker was the former UK Member of Parliament Gyles Brandreth, who was both entertaining and enthusiastic. Guests raised over £780,000 ($1.2 million) for the nominated charity, Action against Cancer, which is researching a new treatment for the disease.

The big global awards of the night went to Wells Fargo as best bank and Goldman Sachs as best investment bank.

António Horta-Osório, the chief executive of Lloyds, was Euromoney’s banker of the year.

Lloyds Banking Group is an interesting story. The old Lloyds Bank was a jewel in the crown. Under its former chief executive (and latterly chairman), Sir Brian Pitman, the bank was unassailable. Pitman’s achievement was to focus consistently on shareholder value and eschew the fashion of the day for investment banking and foreign adventures. Pitman ran Lloyds from 1983 to 2001 and made the institution the undisputed king of UK high-street banking. A mere seven years after Pitman exited the premises, the senior management of Lloyds – chief executive Eric Daniels and chairman Sir Victor Blank – betrayed shareholders when, under pressure from the UK government, they agreed to buy another UK bank, HBOS, which was on the verge of bankruptcy. Effectively, that was the end of the bank that Pitman had laboured to build as well as the reputations of Daniels and Blank.

UK taxpayers ended up owning over 40% of the group. All looked very black for the Black Horse (as Lloyds was known because of its distinctive logo). Losses at the HBOS business proved to be higher than expected. Hardly surprising given that due diligence had been extremely skimpy. And the bank’s management floundered, apparently incapable of dealing with the fate they had brought upon themselves.

In late 2010, it was announced that the chief executive of Santander UK, António Horta-Osório, would replace Daniels in the spring of 2011. Horta-Osório brought in a new team, restructured and refocused the group and with a lot of hard work heaved Lloyds back from the brink. So now, in the summer of 2013, the government has announced that it will start to sell down its 40% stake in the group.

It is easy to say, but I have always been a supporter of Horta-Osório. In May 2010, I picked him out as a banker whose career had true momentum, writing: "I expect Horta-Osório to play an even more prominent role in European banking in the next few years. Good commercial bankers are hard to find." When Horta-Osório’s appointment as Lloyds’ chief executive was revealed, I wrote in my December 2010 column: [This] "is good for Lloyds, good for the UK taxpayer and it is good for Great Britain that high-calibre individuals want to nurse our sick children." In January 2011, when musing about the changing of the guard at the top of British banking – remember that Bob Diamond at Barclays, Stuart Gulliver at HSBC and Horta-Osório at Lloyds all became CEOs in early 2011 – I wrote: "Antonio may have the best chance of success. Firstly, an outsider often finds it easier to make the tough but necessary choices. Secondly, the ancien regime was so discredited that Antonio merely has to turn up and turn on his engaging smile to be regarded as a hero."

Horta-Osório’s tenure has lived up to my expectations. But it has been a queasy journey for shareholders, whether they be institutions, the government or UK retail investors. Lloyds’ share price was roughly 62 pence when Horta-Osório took over on March 1 2011 and it closed on July 19 2013 at 69.25 pence – an approximate 12% increase in roughly two-and-a-half years, some 4.9% a year. This is certainly not an outstanding return, although it has to be set against the backdrop of a turbulent market for financial stocks. By way of comparison, during the same period, the HSBC share price also rose by 12% and Barclays’ had a more modest gain of 2%. What this shows me is that despite commentators trumpeting that some equity markets are at an all-time high, equity investing is a bit like a game of snakes and ladders. It all depends which shares you buy, when and at what price.

However, what puzzles me about the recent performance of Lloyds’ share price is the heady and steady ascent in recent months. In the past three months, the share price has risen some 47%, despite it being widely reported that the government will look to divest some of its stake this autumn. It seems that the UK Treasury is targeting three different types of investors: sovereign wealth funds, institutional investors and retail investors.

The received wisdom is that sovereign wealth funds will have to buy the shares at a premium to the current value. This surprises me and I will be interested to see how such an offering plays out. I am also surprised that Lloyds’ stock price is so robust as essentially if you buy the bank, you are betting on a strong UK economy: Lloyds is the biggest mortgage lender in the UK. Yet during the same three months that the Lloyds share price has performed so well, sterling has not strengthened at all against the US dollar and in fact the general sentiment is that the currency might fall further. Isn’t this a contradiction?

"Not at all," purred one source. "Lloyds is a turn-around story, and everyone thinks Horta-Osório walks on water." A respected bank analyst was more considered, verging on the cynical: "Investors are buying Lloyds because they perceive it to be a geared play on the UK economic recovery and rising house prices. No one wants to own RBS. Barclays’ revenues are heavily orientated to investment banking, so Lloyds benefits by default. It is also something of a self-fulfilling story because as the government sells down its stake, there could be more demand for the shares from index-trackers, and income funds will start buying when the dividend is re-started, which management is now talking about. Management is also talking up the story so that the government can exit above their 61 pence break-even price."

Lloyds’ second-quarter results will be announced on August 1. I will be interested to see what they reveal and will be following closely the divestment of the government’s stake in the bank. But I would warn devoted readers looking to scoop up a bit of UK PLC that, at the time of writing, Lloyds shares don’t look cheap as they are trading above tangible book value.

Of course, the best time to buy banks is when they are in trouble – that is as long as they don’t go bankrupt. I was thus intrigued to see that, according to the Financial Times, the Abu Dhabi sheikh, Sheikh Mansour, who came to the rescue of Barclays at the height of the financial crisis, has recently sold the rump of his stake in the UK bank. In October 2008, Barclays raised over £7 billion from the Abu Dhabi and Qatar sovereign wealth funds, as well as some other institutional shareholders, in the form of reserve capital instruments and mandatorily convertible notes. This offering was done on extremely attractive terms for the investors and included a sweetener of free warrants that could be converted into more shares. Indeed, Abu Dhabi sold its Barclays’ shares (but kept the warrants) some eight months later and made a return of about 70%. That would make me think twice – if I were a sovereign wealth fund – about purchasing Lloyds’ shares at a premium to the current price. Just a thought, but if a successful investor such as Sheikh Mansour is selling his holding in the UK banking sector, is it a good time for retail investors to be rushing in?