When Sir Brian Pitman was the highly respected and uncompromising CEO of Lloyds Bank PLC at the turn of the century, it was generally acknowledged that the ‘Black Horse’ was the ‘number one High Street joint stock bank,’ Life moves on. Enter stage left the American Eric Daniels as CEO with a highly respected chairman in Sir Victor Blank, the former leading light at the merchant bank Charterhouse Japhet. Life at Head Office was about to change dramatically!
In 2008, HBOS looked like being a huge toxic embarrassment, with a massive indiscriminative property loan portfolio; highly likely to go down the ‘Swanee.’ The Government had already been embarrassed by Northern Rock and RBS and did not need a third to be bailed out. PM Gordon Brown has a word in Sir Victor’s ‘shell-like’, so history would have us believe, and HBOS was scooped up like ‘a damsel in distress’ by Lloyds in January 2009. HBOS’S Chairman Lord Stevenson, former CEO Sir James Crosby and the then current CEO Andy Hornsby headed off into financial oblivion, with Crosby to be stripped of his knighthood. There was clearly no synergy with this deal. All that happened was Lloyds’ good name was unnecessarily rubbished by HBOS’s horrendous balance sheet. A subsequent bailout of £25 billion by the taxpayer was implemented.
Eric Daniels was eventually replaced by Santander’s Antonio Horta Osorio in March 2011. Lord Norman Blackwell has been a sound and supportive Chairman. Lloyds shares cascaded down to 31 pence in March 2009. They did reach 87.5p in 2015 and today stand at 56.65p at 9.15am. Also, in fairness Morgan Stanley did a decent job of dribbling out stock, taking the ‘Black Horse’ out of the taxpayer’s hands.
Since then Lloyds has been dogged by these eye-watering PPI claims costing the bank just over £21 billion out of the £50 billion that has been paid out in total. It is thought that the £2.45 billion provision in today’s earnings figure, was inflated by the August 2019 deadline. That should be near enough the last of the claims. The return on equity has also been unsatisfactory, though mitigating circumstances such as the increased capital required to execute the same business has taken its toll.
This morning Lloyds Banking Group posted a pre-tax profit for the year of £4.4 billion (net £3 billion) The return on equity was parsimonious at 7.8% (HSBC 8.4% and most US banks between 11-13%). There will be no share buybacks. The dividend of 3.37p will be maintained. The net margin of 2.88% was decent in comparison to RBS (circa 1.98%). Tier One Capital was positive at 13.8%. Lloyds has little in the way of variety in its business portfolio. There is no investment banking contribution. Lloyds sold Scottish Widows for a song - £660 million in 2013. Lloyds is the quintessential ‘Boring Bank PLC’ – what the regulator wants as does the government and public. The anger against the banks remains intense and hostile.
This bank will be extremely reliant on the domestic mortgage market remaining buoyant, the hope that the UK economy will eventually select another gear post the BREXIT lull. Early evidence of the ‘Boris Bounce’ look good. However, if global growth dips measurably and the negotiations go badly with the EU, Lloyds share price could be stuck in a quagmire for some time.