António Horta-Osório, the outgoing chief executive of Lloyds Banking Group, arrived in 2011 with one job to do. The bank was recovering from the traumatic events of the financial crisis, when it had been tempted into the disastrous acquisition of its UK rival, Halifax Bank of Scotland. The bank’s leadership had been so eager to grasp the long-cherished prize of domestic consolidation that they did not realise HBOS was, in fact, a poisoned chalice. Its losses eventually forced the British government to bail out Lloyds and take an equity stake in what was then — and still is — Britain’s biggest retail and small business lender.
The after-effects of those tumultuous years have kept Mr Horta-Osório busy. Not only did he have to repair the bank’s balance sheet but also pay out more than £20bn in mis-sold payment protection insurance, where Lloyds had been one of the worst offenders. This firefighting put on hold the bigger strategic question that has dogged Lloyds for more than 30 years. Its dominance in the UK market is its greatest strength, but also a potential weakness. Mr Horta-Osório eschewed ideas of buying banks in other geographies and instead chose to commit to the UK economy by buying another UK-focused business, a credit card operation.
In many ways, Mr Horta-Osório was following the lead of one of his predecessors, Brian Pitman. Sir Brian flirted with big acquisitions, trying to buy first Midland Bank and then Standard Chartered. Eventually he chose to concentrate on improving Lloyds itself, focusing on what retail customers wanted and shareholder returns. The strategy — largely followed by his successors, most notably Eric Daniels — created a domestic franchise and proved to be a strength in the run-up to the financial crisis which exposed the expensive expansion sprees of many of Lloyds’ peers. The strategic challenge has not gone away, however, and the question of diversification from the reliance on the UK will have to be tackled.
Today’s economic crisis together with Brexit could make the next two years almost as challenging as when Mr Horta-Osório took over. The changing nature of the banking industry also means it will be difficult for a new chief executive to repeat Sir Brian’s approach. The rise of financially savvy challenger banks and fintech companies, which can provide many of a bank’s functions, will be difficult to stop. The introduction of Open Banking in January 2018 to reduce the advantages of incumbent high-street lenders may have been slow to start but is gathering momentum. A large branch network — Lloyds has more than 2,000 branches throughout the UK — no longer carries the competitive advantage it did. Digital transformation would have topped the agenda for any successor but given the downturn, a new chief may be tempted to put that on hold.
They should resist the temptation to postpone the revolution. Britain’s post-Covid economy looks set for, at best, a period of pedestrian growth. History suggests expanding from a strong domestic base by buying weak global franchises usually ends in failure. A new chief executive will therefore need to work out how the bank can improve its profits against tough competition in the UK. This will involve further cost cutting and exploiting Lloyds’ market share by creating new products. Sir Brian, drawn by the cost efficiencies of the digital transformation, would probably have been a keen supporter. Mr Horta-Osório’s successor should heed the lessons of the past and ignore the siren calls of international diversification — and concentrate on making the UK bank fit for the future.
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