Former Abbey CEO Luqman Arnold tells Karina Robinson about his future plans and why it is important to take time out occasionally.

It is appropriate that Luqman Arnold’s sun-filled office is in private equity/hedge fund-land in London’s swish Mayfair. The former CEO of Swiss bank UBS and UK bank Abbey is about to embark on his latest venture in a varied career in financial services.
“I am looking seriously at getting involved in direct investing, based in private equity but reaching into the area of convergence with hedge funds,” he says. “I would like to stay focused entirely on financial services. I think there is a lot of scope to invest well and actively in this area. However, anything I do, I would want to do internationally.”
The 55-year-old recently failed in his bid – allied with several large private equity firms – to take a big, listed financial services company into the private domain. This is not a new interest: in 2002 he “went quite far” with UK insurance company Royal & Sun Alliance before taking up the Abbey job.
He is no longer a fan of listed companies, noting that the impact of quarterly reporting makes investing long term to benefit the business problematic. Traditional fund managers are judged quarterly, while private equity firms take a longer view. In fact, given their incentive structure, private equity firms are better off taking a long-term view, he says, in his first full interview since leaving Abbey.
Current challenge
Nor does this father-of-one believe private equity and hedge funds are a fashion that will depart. “The big challenge today is what do you do with your money. You have very low yields so you are looking for investment management talent, which has gravitated to where it has flexibility and gets rewarded accordingly,” he says.
Mr Arnold does think there is an issue on whether leveraged buyouts will be able to deliver the same returns when interest rates rise but he notes, first, that in financial services the leverage is less than in corporates and, second, he does not see those rises coming soon.
“For the next two to three years it is difficult to see significant interest rate increases. Everyone is caught in this danse macabre where it is in everyone’s interest to keep the money flowing,” he says.
Married to an entrepreneurial and gorgeous Thai (whom I last saw barefoot and in sapphires, dealing with firemen as they attempted to extricate some party guests from a lift in their house), Mr Arnold believes in taking time out to ponder. In 1992, he took a year’s sabbatical to research cross-border institutional investment flows, following on from his job at CS First Boston and before his stint on the executive committee at Banque Paribas, now BNP Paribas.
Time to think
Even during his busy times as a CEO, he insisted his secretary carve out one hour and 15 minutes of private time daily “just so I could think”.
Here are some of those thoughts on what will affect the global banking panorama in the next 10 years, including a possible market disruption. Due to his current role as an adviser on strategy to Emilio Botín, chairman of Grupo Santander, and to his continuing involvement in the industry, he could not give examples. However, most readers of The Banker will probably be able to think of a few banks that fit the following criteria:

 “The banking market has been delivering extraordinary cash flow but banks are increasingly challenged to deliver earnings growth. What is worrying for financial services in the long term is the flat yield curve – but in emerging markets, it is still steep.”

“Indebtedness is exceedingly high – consumer, leveraged buyouts. Banks have become very good at securitisation, using derivatives to vanish the debt from their balance sheets. But you are vanishing debt from regulated entities to entities that are not regulated on the same criteria.

“Look at valuation risk – if a dislocation occurs and if people try to get out the door at the same time, it becomes a buyer’s market and you see it [the instrument] for what it is. The basis for valuation is the cornerstone for a lot of business in the credit markets. Valuations depend on realistic, conservative exit assumptions that need to be taken account of in stress testing. Would people not be able to get out or are they [instruments like collateralised debt obligations] not what they seem? Can this pace of innovation in packaging debt continue or is there a certain point at which it becomes too clever and can’t stand a dislocation? If something like this [a market upset] happened – I am just proposing it – and every banker must be thinking of it – regulators become much more amenable to deals.”

“Another important factor is the regulatory impact and consumer and client protection. We are seeing the impact now in investment products with clients who are hard-done-by claiming redress. Banks will increasingly have to take this into account, [along with] the need for transparency. Transparency never acts to increase margins; it reduces margins.”

“One of the challenges for [bank] leadership is to balance the extraordinary profits from a business – proprietary trading and ever more innovative structures – against the risks. And to be willing to sacrifice profitability for risk.”

“Banks have high cash flow, low earnings growth and are [part of] a regulated industry. They are utilities with prop [proprietary trading] desks. Bankers in the past 10 years have become used to feeling like a high growth industry and they don’t like this. Banks think their valuations are too low”. And if they want to acquire, “there are fewer attractive targets than people who want to acquire. There are the risks of not being early enough or the risks of problems with the acquisition. There is the late entrant angst of not having anything there” and of then overpaying.

“A new factor is the power of activist investors, who intervene if [the bank] is making too many acquisitions or is paying too much for an acquisition. It is scary for chairmen and chief executives.”

“IT has developed to the point where it can deliver cross-border synergies. Your risk management and asset liability management can improve value.”

“You have to be careful about weak management joining up to get scale – that is just a deferred target.”

“[I see] consolidation in asset gathering and wealth management but accompanied by spin-offs of asset management of big banks because synergies are limited in the open architecture world and the earnings impact is relatively small. If asset management is 40% of the business, it makes sense [to keep it], if 5%-10%, it does not.”

“In all the cleverness of risk management today, the value of retail deposits has been ignored. In a world awash with liquidity, you can look down at retail deposits. In a more normal world, they are the holy grail.”
The Abbey story
Mr Luqman was criticised for selling Abbey to Santander, with some commentators saying his one aim had been to sanitise the former building society and sell it on as quickly as possible – and he had lined up his pay packet accordingly. He denies the accusation, insisting that a “15 million-customer bank with low morale, five years of underinvesting in the core business and problems in the substantial life businesses, you assume is un-sellable”.
Later, once he and his team were well into the process of turning the bank around, he says: “Terry [Burns, the chairman] and I had mixed feelings about being bought as we were not through with our strategy to make banking accessible.”
Walking away with about £5m probably helped. It, along with the fruits of his long career, will be an aid in his next incarnation.
In the meantime, the banker with Cupid’s bow lips is a member of the Financial Capability Steering Group, led by the Financial Services Authority, which aims to increase the UK public’s understanding of the industry and its products. He is also chairman of the Design Museum, sits on the development council of the University of the Arts in London, and is a trustee of the Architecture Foundation.
All of which leaves him extra time to think. But soon enough his secretary will be carving out that one hour and 15 minutes with great difficulty.

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