Lloyds Banking Group's new CEO, António Horta-Osório, had an easy option: to stay at the helm of Santander UK and await the promotion within the group that many saw as both imminent and inevitable. Instead, he left to front the bailed-out UK bank. In his first interview since joining Lloyds, he gives The Banker's editor, Brian Caplen, an insight into why he made the move.

António Horta-Osório is not someone who stays in his comfort zone for too long. Having successfully steered Santander UK through the crisis and bolted on two acquisitions, the easy option – some would say the sensible option – would have been to lead the bank’s forthcoming UK initial public offering (IPO) and wait for promotion within the group.

Instead he opted to become chief executive of Lloyds Banking Group –  the UK bank which fell into state ownership following its disastrous acquisition of HBOS in 2008, which is marginally profitable at best, and is beset with problem loans that amount to 10% of its total book and are continuing to grow.

Observers both inside and outside Santander agree that if Mr Horta-Osório had stayed at Santander, before long, the group’s legendary chairman Emilio Botín would have picked him as the new CEO to replace Alfredo Sáenz.

Given the news last month that the 68-year-old Mr Sáenz has been barred by Spain’s Supreme Court from serving as Santander CEO for three months – the result of a long-running case relating to a conviction for false accusations against debtors when he was chairman of Santander-owned Banesto in 1994 – that call from the chairman might have come sooner rather than later. (Officially Santander has said that Mr Sáenz will appeal against the ruling and expressed confidence that he will continue in the CEO’s role.)

In the race to secure Mr Horta-Osório’s services, very unusually, 76-year-old Emilio Botín, the master strategist of banking, was outwitted – or outcharmed – by 39-year-old George Osborne, the UK's youngest chancellor of the exchequer in a century.

A tale of two bankers

Mr Horta-Osório’s appointment was made by Lloyds but as the UK government holds a 41% stake through UK Financial Investments, the chancellor’s views carry huge sway, and it is well known that it was Mr Osborne’s personal wish that he should get the job. Emilio Botín’s daughter, Ana Patricia Botín, previously the CEO of Banesto, was sent to London to replace Mr Horta-Osório as head of Santander UK. Ironically it was Ms Botín who recruited Mr Horta-Osório to Santander from Goldman Sachs back in 1993 – now they are competitors.

Let’s compare their in-trays:

Ms Botín: retain profitability in a tough market; lead the Santander IPO; dodge the shrapnel from the UK's belligerent press which has bankers in its firing line.

Mr Horta-Osório: change the culture of one of the UK's most traditional banks; raise morale among its 110,000 workforce; sort out the problems in its loan portfolio that include exposure to Ireland’s wrecked economy, non-performing commercial property loans and mortgages with negative equity; dispose of 600 branches as ordered by the European Commission as a penalty for accepting state aid; finish the integration of HBOS and Lloyds; get the share price up so that the government recovers value on its 41% equity investment; increase lending to small and medium-sized enterprises (SMEs) which was a contractual condition in taking the job; take the full blast of the media’s hostility to bankers and banks, especially towards those that required government bail-outs, such as Lloyds.

Botín's hard task

This is not to say that Ms Botín has an easy task ahead of her. All UK banks face the challenges of a sluggish economy in the midst of a massive deleveraging exercise and with huge cuts in public spending on the way. The housing market is flat at best and further falls in prices cannot be ruled out. In addition, the government has imposed a levy on the banks in an attempt to make them pay for their role in the crisis; the UK Financial Services Authority has implemented some of the strictest liquidity rules anywhere in the world; an Independent Banking Commission has been tasked with reviewing the structure of UK banking to make it both safer and more competitive and may well recommend a game-changing overhaul. And, as in the US, banking has become a political football, with bank executives likely to be hauled before treasury select and other committees for a grilling by MPs – whose knowledge of banking is limited but whose sense of political theatre knows no bounds.

For an example of the latter, when new Barclays CEO, Bob Diamond, was asked to testify before a treasury select committee, one Labour MP asked him, in a direct extract from the Bible: "Why it was easier for a camel to get through the eye of a needle than for a rich man to get into the kingdom of heaven?" Mr Diamond sensibly declined to respond.

So Ms Botín’s task is not easy, but to boil it down to the basics: she is running a healthy bank in a tough environment; Mr Horta-Osório has to repair a wounded bank under the same conditions.

Out of the zone

“We don’t like to stay in our comfort zone do we?” says Mr Horta-Osório to his corporate affairs director, Matt Young, at the end of his interview with The Banker, the first one-on-one interview he has granted since becoming CEO. Mr Young is one of only four Santander executives to have followed -- or be about to follow -- their boss across town from Euston Road, close to London’s famous shopping area around Oxford Street, to Gresham Street in the heart of the city's financial district, where Lloyds has its headquarters.

Mr Horta-Osório had only been in post officially for three weeks when he spoke to The Banker but already things are moving at a furious pace. He has initiated a strategic review of the business to be completed by the end of the June; he has revamped the management structure to make it flatter and give more visibility to key areas such as SMEs and customer complaints; risk management is being overhauled; he plans to accelerate the disposal of the 600 branches as required by the European Commission; and, very crucially, he has decided to retain the key brand names in the Lloyds group – Lloyds, Bank of Scotland, Halifax – which is a departure from the single-brand strategy pursued rigorously by Santander.

Mr Horta-Osório says it is crucial that the reform process moves fast because of the uncertain environment both in the UK and in the eurozone.

“I am prudent as a banker normally. I think it will be a slow recovery with potential hiccups. My function, and the function of my [management] team, is to let the staff here know that they have done good work in terms of deleveraging and increasing capital but that the future is uncertain and potentially difficult. So let’s continue with this process and, if possible, go more quickly because of the potential risks the economy worldwide faces.

“Speed for me is one of the key characteristics, one of the key features that we have to make part of the DNA of the bank. On the day of my appointment I announced that I am starting a strategic review with the aim of finishing by the end of the first half [of 2011] – to review all businesses and all areas, and [to determine] from a cost-income point of view, return on equity, risk-adjusted return on assets, which businesses we want to be in and with what kind of investments, which ones we want to grow, which ones we don’t; what is the combined picture?

“We have decided to accelerate the sale of the 600 branches agreed with the commission and the government. We need to get started because the end of 2013 [the deadline for completing the sale] is not so far away. From a technical point of view, we are going to finish the integration of Lloyds and HBOS in the summer and then, from the summer onwards, we can use all our resources in building the infrastructure for these 600 branches.”

Going verde

So far press reports have suggested that National Australia Bank (NAB) – which owns the Clydesdale and Yorkshire bank operations – and NBNK Investments – established last year by Lord Levene, chairman of the insurance market, Lloyd's of London (not connected in any way to Lloyds Bank) – are both interested in bidding. The purchase would give the acquirer the rare opportunity to get hold of 5% of the UK banking market, similar in size, points out Mr Horta-Osório, to former building society Abbey when Santander bought it in 2004. Since then, of course, Santander has added Alliance & Leicester, Bradford & Bingley as well as the 300 branches that Royal Bank of Scotland was forced to sell by the European Commission as its penalty for accepting state aid.

The name of the disposal process is Project Verde, which is apt because verde means green in Portuguese, and Mr Horta-Osório is from Portugal, and is a fan of Sporting Lisbon, the Portuguese football team famous for its green and white hooped shirts. But he is at pains to stress that the name was agreed upon before his arrival.

“It is not my invention, I can assure you. It was already called Project Verde when I arrived,” he says.

With a big integration, inevitably jobs will go and on March 17, Lloyds announced it was axing 570 jobs and outsourcing another 450 to a contractor. More than 20,000 jobs have been axed since the HBOS acquisition.

A report from broker Exane BNP Paribas noted that this downsizing “left the group well placed to deliver against its targeted £2bn [$3.25bn] of cost synergies”. The other key shrinkage will come in assets, with £200bn being sold off or wound down over the next three years – about a 20% reduction, half of which has already been completed. Rating agency Fitch reports that the impact of all the disposals would be a £500m fall in pre-tax profits.

Multi-brand, multi-branch

Given the downsizing and the various uncertainties, bank staff and customers will be relieved to hear that Lloyds, unlike Santander, will pursue a multi-brand and multi-branch strategy and that no branches will be closed at least until the strategic review is completed.

Mr Horta-Osório says: “We will keep the different brands because the customers are very different in terms of attitude. Halifax customers are more entrepreneurial, more prone to change, more price sensitive [than Lloyds’ customers]; Lloyds’ customers are quite representative of the UK as a whole. It is one of the oldest and most respected brands in the UK. The Halifax brand is more segmented, given its status as a challenger in the past. We want to recover the brand as a challenger and get it into the ‘best buy’ tables offering great value [enabling us] to fight the former building societies such as Nationwide and Santander UK.” The Bank of Scotland brand will also be kept as the main brand in Scotland but smaller brands such as TSB and Cheltenham & Gloucester will disappear under Project Verde.

The decision for Lloyds to stay multi-brand was also based on size. Lloyds has 1800 branches and Halifax has 700, even after closing down 200, so it has critical mass. Bank of Scotland has 300 branches. By contrast, Santander UK was composed of 600 former Abbey branches, 300 from Alliance & Leicester and 300 from Bradford & Bingley well dispersed geographically and with similar client bases – therefore a single brand strategy made sense. Multi-brand does involve higher marketing costs but there will still be integration savings in the back office. 

Management revamp

Another early decision of Mr Horta-Osório’s was to revamp the management and go for a flatter structure, with 12 direct reports instead of seven, as previously, and fewer management layers – this revamp reduces the layers by one from nine to eight. At Santander there were only six but this was a smaller bank so it is not necessarily a model for Lloyds.

Key target areas such as SMEs under John Maltby now report directly to the group executive committee as do customer complaints under Martin Dodd (critics of banking in the UK point to the high number of customer complaints and the lack of lending to SMEs as major failings). There are now three direct retail reports: retail products and marketing will be led by Antonio Lorenzo, who was CFO at Santander UK and is group director for wealth and international; the Lloyds TSB and Bank of Scotland banks will be led by Alison Brittain, the latest executive to defect from Santander, who will join in September (current incumbent Joy Griffiths will leave at the end of June); and Halifax continues to be led by David Nicholson.  

High-profile departures include former group executive director retail Helen Weir, who joined the group as finance director in 2004 and was at one stage considered a candidate to take over from former CEO Eric Daniels (who controversially took the bank into the disastrous HBOS merger). Ms Weir was another who felt the heat of the treasury select committee when she claimed that most consumers knew the cost of their current accounts but was then forced to admit that she did not know the cost herself. Archie Kane, group executive director for insurance and Scotland, has decided to retire.

Mr Horta-Osório says his management revamp has three aims – flattening the structure, giving more visibility to the different businesses and promoting people inside Lloyds.

The other key post to go to an ex-Santander executive is that of chief risk officer, which is held by Juan Colombas. He performed a similar role at Santander and replaces Carol Sargent. In further changes to better control the bank, Mr Horta-Osório has made audit a group executive committee post under Martyn Scrivens, and risk and finance are separate functions rather than reporting into the business areas as before. The idea is that they look at creditor decisions on an individual basis outside of the commercial pressures of the business. The group finance director is Tim Tookey.

Lloyds key numbers ($m)

Number confusion

But for all the positive changes there is no getting away from the numbers. Mr Horta-Osório refused to comment on the 2010 results and did not attend the February results meeting when a £2.2bn profit was reported following a £6.3bn loss in 2009.

Analysts disparaged the latest numbers, saying that the bank was only profitable because of a fair value unwind of £3.1bn relating to HBOS’s assets and liabilities. A report by Creditsights concludes that the full-year underlying operating loss was £709m: “This number is simply income less expenses and the impairment charge, and represented a significant improvement over the heavy losses reported in 2009, thanks mainly to lower impairments,” the report said.

According to Exane BNP Paribas: “For those who focus on the ‘combined business basis’ measure of profits before tax, then the 2010 results might look OK – but that is an illusion.” The analyst then goes on to warn about costs being taken below the line such as a £500m ‘customer goodwill payments provision’ after a settlement with the regulator over misleading mortgage offer documents and a £400m loss on disposal.

Lloyds chairman Sir Win Bischoff told journalists that Mr Horta-Osório had played a role in the gloomy commentary that accompanied the results and his hand may have been behind the prediction of a flat net interest margin of 2.1, which was received negatively by the market.

Picking the positives

Mr Horta-Osório refers to the considerable headwinds facing the bank but there are some positives – its capital position has been strengthened and asset-to-deposit and cost-income ratios are moving in the right direction. Impairment losses were 45% lower in 2010 at £13.2bn, although total impaired loans rose to £64.6bn, or 10.3% of total loans, a very high number.

Mr Horta-Osório sees turning round Lloyds as a three- to five-year project. “In the next five years the priority of this bank is to continue the good work done in terms of funding and integration. The integration will be finished this year; on the funding, we still have some way to go but the trends are good.

“We want to have a smaller bank but a much better bank and a more competitive bank. Lloyds has a very high cost-income ratio [46.2%] compared to the best in the sector. The focus is to make it as fit-for-purpose as possible and this will be a three- to five-year project. We will be totally focused on the UK with the ultimate aim of getting tax-payers their money back. To achieve this will require putting the customers at the heart of the bank.”

Right now it also involves Mr Horta-Osório putting in 16-hour days, seven-day weeks, and embarking on a packed schedule of branch and customer visits – exhilarating no doubt, but a long way from anyone’s idea of a comfort zone.

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