Having rewritten Lloyds TSB’s poor growth story, CEO Eric Daniels now wants to strengthen the bank’s franchise, he tells Karina Robinson.

Eric Daniels “is a stuffed shirt but what he says is good,” says a Lloyds TSB Group director about the man who has been group chief executive since 2003.

“Under Daniels, [you are told] keep spreading your wings and we’ll give you some guidance when you are near the edge.” This marks a 180-degree turn from the centralising style of his predecessor, Peter Elwood.

There must have been some interesting chats in the CEO’s office when Mr Daniels was head of UK retail banking under Mr Elwood for a couple of years.

Interviewed in his rather traditional, modestly sized office at the top of the Lloyds TSB headquarters in the City of London, US-born Mr Daniels shows his roots in the choice of a striped blue shirt with white collar and cuffs and embroidered monogram. But describing him as a stuffed shirt seems wide of the mark. What is apparent, instead, is intelligence – he has an MSc in management from the Massachusetts Institute of Technology – and a guarded optimism. The proverb “still waters run deep” comes to mind.

Growth turnaround

That combination has been successful so far in turning around the world’s 22nd largest bank by market capitalisation. Its growth performance had previously lagged that of its peers. The 54-year-old married father of one says he is “content” five times during the interview, when talking about the evolution of the 16-million-customer bank under his leadership. But there is a caveat. “There is a huge difference between being content and seeing the opportunity in front of us. I am content with our progress but I see an enormous amount of opportunity,” he clarifies.

Translated from management speak, there has been a marked improvement in the bank’s three divisions but challenges remain. In 2004, Lloyds TSB’s pre-tax profit rose 10% to £3.4bn and it posted a 23.5% return on capital. Almost half its profits came from UK retail banking, 34% came from corporate banking and international banking (excluding a £15m loss on the sale of international businesses) and the rest from insurance and investments, mainly under its Scottish Widows brand.

The corporate bank’s pretax profit grew by about 23% in 2004 while the retail side grew 12%.

When Mr Daniels took charge in 2003, the bank was labouring under fears that it would be forced to cut its generous dividend because of worries about the capital position of Scottish Widows. It now has a total capital ratio of 10%, with Tier 1 at 8.9%, and sufficient revenue growth that most analysts believe the 7.3% dividend yield is sustainable.

Although understandably unwilling to make any promises, Mr Daniels believes the group is now well capitalised, with strong enough growth to allow for investments in the business – 10% of revenues a year, equal to about £1bn – and to keep the dividend at current levels. It was maintained at 34.2 pence per share last year.

Share value

Although the analyst community is now much more positive on Lloyds, there are detractors. Morgan Stanley said in a March report that the bank’s “underlying pace of revenue and operating growth is about half that of its immediate UK peers, yet the group trades on a valuation multiple which is about 150 basis points higher than the average for UK commercial banks”. The investment bank set a dismal price target of £3.80 from the shares, a massive drop from the £5.06 price on the day of the report and a clear sign to sell the shares.

When asked whether the shares are fairly valued – they were £4.55 on the day of the interview – Mr Daniels says: “You would never get an industry [head] to say their shares are fairly valued. But it was a good try!”

Laughter aside, the share price is crucial because the merger and acquisition dance is hotting up in Europe and the US. Mr Daniels is consistent in talking of the need to focus first on the opportunities in the existing franchise. But cutting the cost-income ratio, which is currently 51% (through restructuring processes rather than “saving paper clips”, he says), and improving the share of wallet of customers on the retail and corporate side takes time. It is far from obvious that Lloyds will have that time.

Leaked talks with other banks over the years have so far led nowhere. In terms of merger opportunities, Mark Thomas, UK banks analyst at independent research house Keefe, Bruyette & Woods, says: “You would want someone poor at retail banking and good at wholesale, willing to merge with a UK bank and not averse to insurance. Deutsche Bank is just about it but there are political obstacles.”

Economies of scale

Mr Daniels does believe the argument that there will be further consolidation in the banking industry because of the compelling logic of economies of scale and the diversification advantage. Unlike Daniel Bouton, head of Société Générale (see The Banker May 2005), who believes that the significant synergies will come from the corporate side, Mr Daniels (a former Citibank executive) believes the synergies on the retail side of European banking should not be discounted. “If you have common IT platforms, common manufacturing, you can build scale,” he says, in his soft-spoken, measured way.

The truth is that the bank is crying out for diversification. Having sold the majority of its international operations, notably the underperforming Latin American businesses and the New Zealand business, none of which had sufficient scale, Mr Daniels is left with a UK franchise. So far, better growth in the UK than in most developed economies has been a boon, but with UK GDP growth due to slow along with consumer demand, and with non-performing loans rising, banking profitability will be challenged.

As a result, Mr Daniels foresees more competition and even more pressure on margins. Banks will have to come up with more innovative products and more ways to reach the customer. His argument is that the bank has a wonderful opportunity on this front. It has a dominant market share of 22% in current accounts but only 13% in personal loans and 9% in mortgages. He believes the current account percentage is Lloyds’ “natural market share” so, by serving the customer well, the others can be raised.

Yet, as he himself admits, competition is fierce in the UK market with, for instance, 128 mortgage providers and 66 credit card providers. Incremental increases in market share are believable but it is difficult to imagine them becoming significant, especially with a revitalised, Santander-owned Abbey and other banks like HBOS intent on capturing market share.

On the corporate side, the story is similar. Many UK corporates have relationships based on loans or money transmission with Lloyds but turning those into higher-margin financial market or cash management relationships is not easy. The admirable 59% rise in cross-selling income in the corporate bank in 2004 will be difficult to reproduce.

Keeping promises

Still, Mr Daniels has been delivering on his promises. “For him, at the end of the day, it is all about execution,” says a director of the bank. Mr Daniels’ management style has been to devolve responsibility lower down the management pecking order.

However, this does not mean accountability has flown out of the window. “He has instituted quarterly reviews for business units from director level up – everyone quakes when they come round,” says a (very successful) director. “He challenges you again and again, and you always go away with a question you could not answer. Some react better than others.”

Managing the bank’s 70,000 staff is one of Mr Daniels’ main priorities. His top management team contains a mixture of talent from within Lloyds and from outside. The latest high-profile signing is Terri Dial, the well-respected former CEO of US bank Wells Fargo.

One director questions whether Mr Daniels has the vision to take the bank beyond the UK. Although that is impossible to answer, his CV gives a hint that he is not averse to the unexpected. His 23-year career at Citibank encompassed postings in Panama, Argentina, Chile, London, New York, San Francisco and Brussels.

At some point he gained a Panamanian wife and mother-in-law. The latter, according to Mr Daniels, takes umbrage when the bank’s former Latin American franchise is described as “extraneous”. Sometimes, the hardest battles have to be fought at home.

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