domingo, 21 de maio de 2017

How Lloyds came back from the brink

António Horta-Osório expected a challenge when he joined the high-street lender in 2011. What he found sent him spiralling into a breakdown

MAY 18, 2017 by: Emma Dunkley and Patrick Jenkins

It was about noon on an unusually balmy day in November 2011 when it became clear that the boss of Lloyds Banking Group was in trouble. Some 60 directors and managers of the UK bank were filing into the London headquarters for an annual lunch that was meant to be attended by its debonair Portuguese chief executive, António Horta-Osório. At 12:30pm, an assistant was sent to summon Horta-Osório, who was running late. By 1pm, it was obvious that there was a problem.

Found in his office unable to face the crowd, barely wanting to speak, Horta-Osório was promptly sent to doctors, diagnosed with stress-induced insomnia and signed off work. He slept almost continuously for nine days, spending time at the private Priory Hospital. 

A handful of colleagues who interacted with him that day say he seemed almost paralysed, such was the impact of the insomnia on his ability to function. “You’d ask him a question and a minute later he’d respond with a one-word answer,” says one. “Was he all right? Long pause. No. Did he want to talk about it? Long pause. Yes.”

Unbeknown to the public and most of the bank staff at the time, Horta-Osório’s lapse was the culmination of weeks of sleep deprivation, stoked by Lloyds’ precarious state amid the eurozone crisis. 

Colleagues believe his troubles stemmed from the bank’s over-reliance on borrowing hundreds of billions of pounds from other institutions in order to continue operating — money at risk of being pulled from one day to the next. For Horta-Osório, who had only joined Lloyds 10 months earlier, discovery of the state of the bank had been too shocking to bear. 

When the news broke of his sudden leave of absence, it triggered a 5 per cent plunge in the bank’s share price to 29p. The episode marked a crisis point at a time when the UK economy was sliding into a double-dip recession. Lloyds’ financial health was already weak after its disastrous takeover of Halifax Bank of Scotland (HBOS) during the 2008-09 financial crisis, which had led to a £20.3bn government bailout at the same time. Taxpayers owned 43 per cent of the bank and scrutiny by both public and politicians was intense.

'Lloyds was basically a challenge I thought I could do...I could not forgive myself if I had refused to try' - António Horta Osório, photographed for the FT at Lloyds Bank headquarters in London © Jack Latham
Almost a decade on, the government has finally sold off the last of its shares in the bank, at a nominal profit of £900m. And Horta-Osório, 53, now a beaming picture of health, can afford to be frank about his breakdown. Sitting in his spacious office overlooking St Paul’s Cathedral, those dark days feel like a far-off memory, he says. “As a CEO these positions are quite lonely, so sometimes there are several things you cannot share with your team, because you have to motivate them. You don’t want your employees to have doubts about your leadership.”

The reprivatisation is a watershed moment for the banking sector, with the UK’s largest domestic-focused bank casting off the shackles of political influence. But the recovery has been tough, knocked by payment protection insurance — the costliest mis-selling scandal of recent decades — and the need for aggressive cost-cutting. And it has been shaped by Horta-Osório’s own journey, from the depths of his personal crisis, through the turbulence of tabloid stories about an extramarital affair, to this month’s triumph as the bank leaves its Whitehall owner behind.


Until the crisis, Lloyds seemed an unlikely candidate for a government rescue. Founded in 1765 as Taylors & Lloyds, the Birmingham bank blossomed during the industrial revolution and soon expanded to London; its acquisition of another bank in 1884 brought the black horse symbol that would soon become familiar on British high streets. 

The next hundred years saw further acquisitions and expansion overseas, from France to South America. By the start of the 21st century, the bank’s size had brought it to the attention of the UK competition watchdog: it stopped Lloyds’ attempt to buy Abbey National in the UK in 2001, convinced the enlarged business would have too dominant a hold over high-street banking.

Lloyds bided its time, considering a takeover of the fast-growing HBOS in 2006, but deciding such a deal was likely to be blocked. Then, the following year, the global financial crisis took hold. Alistair Darling, then chancellor of the exchequer, remembers the growing anxiety. “When Northern Rock went down in the summer of 2007, I had asked from Treasury for a list of every other bank that could also be in trouble — near the top was HBOS,” he says. “Where we became seriously concerned was after March of 2008. After the collapse of Bear Stearns, people started looking at banks [in] a very critical light.”

According to one former Lloyds senior banker, HBOS called Lloyds about entering into merger talks after its own failed attempt to raise money from investors in July 2008. Talks stalled over competition concerns. But September 2008 marked the eye of the global financial storm. US investment bank Lehman Brothers went bankrupt, sending shockwaves through global markets. 

The next day, at a Citigroup party in London, prime minister Gordon Brown told Lloyds chairman Sir Victor Blank that he would waive competition rules. The move would create a bank giant that would own nearly a third of the mortgages and savings in the UK. 

1884: Lloyds acquires Barnetts, Hoares & Co, bringing with it the black horse symbol
“I was convinced the government was going to have to bail out [Royal Bank of Scotland],” says Lord Darling, explaining Brown’s decision. “I also knew we’d have to bail out HBOS and frankly if I could find any private sector help in doing that it was something I could not afford not to do.”

The idea was to shore up HBOS’s weak balance sheet and restore confidence by merging it with the healthier Lloyds. A minister involved in the decision says the government was confident the merged group would be broken up by competition authorities once the crisis had abated, such was its dominant share of high-street banking.

Lloyds’ takeover of HBOS was agreed a couple of days after the collapse of Lehman Brothers. “In these exceptional circumstances bank stability trumped competition . . . and that’s why we agreed,” Darling says. 

And yet, only a month later, the government had to bail out the enlarged group. Lloyds needed £20.3bn of taxpayers’ money in 2008 and 2009. (RBS, another major UK bank that had to be bailed out over those two years, received £45.5bn.) Ever since then, the government has been recouping the money pumped into Lloyds by selling down the 43 per cent stake it acquired from the bailout.

At the time the global crisis was blowing up, Horta-Osório was busy establishing his status in the UK. His charm and technical ability had already helped him scale the ranks of Spanish lender Santander. Born in 1964 in Lisbon to a family of lawyers, he studied business and administration at university, and trained at Citibank in London. In 2006, after stints running operations for Santander in Portugal and Brazil, he was chosen by Emilio Botín, the Santander patriarch, to lead the UK arm of the bank, the former Abbey National. The role brought the opportunity to work closely with government, at the head of one of the only lenders able to buy stricken rivals Alliance & Leicester and part of Bradford & Bingley in 2008.

Salvaging those banks at a time of instability won him political favour. And his rise to power was boosted in February 2009 by an appearance in front of the Treasury Select Committee. Those close to him reckon his slick performance stood out so much from his struggling rivals, including Stephen Hester, boss of RBS, and Eric Daniels, then head of Lloyds, that it gave him a launch pad into the establishment. Within four months, he had been appointed as a non-executive director to the prestigious court of the Bank of England.

“António radiated energy and engagement,” says Sir Roger Carr, chairman of defence company BAE, deputy head of the court at the time. “He emerged as someone who had a magnetic appeal, attracting the attention of Treasury too, who were under pressure to shake up the court of the Bank of England and make it a more serious body.”

In September 2010, Sir Win Bischoff, Lloyds’ chairman, approached Horta-Osório about the top job at the bank. According to a former senior banker at Lloyds, his name had already been advocated by George Osborne, then chancellor, and Robin Budenberg, the head of UK Financial Investments, the body set up to oversee the bailed-out bank stakes.

For Horta-Osório it was a wrench. “I loved Santander, it was perfect for me. I didn’t have any intention of leaving, but when I was asked about Lloyds I thought about it,” he says. “It was basically a challenge I thought I could do, and therefore I thought I could not forgive myself if I had refused to try to do it.”

It was only when he began his new job in early 2011 that he realised the scale of Lloyds’ problems — and how far they exposed it to the European economic downturn. “Lloyds was in a much more difficult situation than I thought, I had no idea,” he says. 

In June that year, Horta-Osório laid out his strategy to reduce the £200bn of toxic loans, largely inherited from HBOS, and shrink some of the problematic short-term borrowing. His vision was to strip Lloyds back to a simple UK-focused bank, for UK consumers. He set to work selling the bad loans and weaning the bank off its more precarious financing. But the strategy only went to plan for a few weeks. 

By August, the eurozone banking crisis was convulsing the markets. US money market funds — a core supplier of finance for short periods of 30-90 days — began pulling funding out of Europe at a rate of $30bn a month. “I knew the bank was very much unprepared to face the eurozone crisis and [UK] double-dip [recession],” says Horta-Osório. As the pressure rose, and anxiety over Lloyds’ future dominated his thoughts, he began to struggle to sleep. 

One person who shared a meal with him in the days before his crisis says it was clear something was wrong. “He was distracted, he couldn’t concentrate. His mind was elsewhere.” 

People close to Horta-Osório say that his breakdown also reflected his tough, self-imposed targets, which by November looked unattainable. Even as a student he could not accept undershooting his goals. Back then, in a bid to ensure he got a prestigious assistant professorship, he had retaken an econometrics exam after getting 18 out of 20. “António’s never failed to hit a target before,” says a former colleague.


The announcement of Horta-Osório’s sudden leave rocked investors. “Naturally I was concerned,” says Richard Buxton, chief executive of Old Mutual Global Investors and a long-term holder of Lloyds shares. “It [had only taken him] a few weeks to develop a strategy, then focused everyone on ruthless execution of it. His absence was early into this, hence I was concerned things would slip.”

Lloyds was forced to immediately reassure shareholders that the CEO’s workload would be reduced once he returned, handing more responsibility to other senior executives, to help him make a sustainable comeback. 

“I was at a chairman’s lunch,” says Anita Frew, deputy chairman of the bank, “and some people said, ‘You don’t come back [from something like this]’, and I said, ‘If anyone will come back it’s António because I’ve seen the mettle of his character.’ [Since then] I’ve seen António, partly because of his sleeplessness and partly because of other things, share much more with the board about the things on his mind. I’ve seen him be more human over that time.”

After nearly two months, Horta-Osório returned to work in January 2012, following a rigorous re-interview process. He and his team focused on selling risky loans on Lloyds’ books to other banks and investors and gathering customer deposits through its many brands, such as Halifax, to repair the bank. “It was full on, in terms of selling assets we didn’t want in order to free up the funds to pay down the funding,” says George Culmer, chief financial officer at Lloyds since mid-2012.

Integrating HBOS on to Lloyds’ technology systems was a mammoth task. Lloyds also had to start the process of selling its TSB unit and repay about £100bn of emergency loans from the Bank of England. On top of this, Horta-Osório faced a government inquiry into whether Lloyds should be broken up to boost competition in the UK — which he resisted. 

While the bank’s recovery continued, there were a number of hiccups. The one that reverberated the most was the payment protection insurance scandal. “I can’t think of any other banking mis-selling scandal that compares,” says Ian Gordon, an analyst at Investec Securities. “Lloyds were the number one sellers of personal loans and therefore sold more PPI than peers.”

Lloyds’ mis-selling of PPI — a practice carried out by many banks over recent decades — predated Horta-Osório’s time there. Keen to get the issue resolved as soon as possible after he joined the bank, he broke ranks with other UK lenders and announced he would pay compensation early in 2011, setting aside £3.2bn. This was seen as a huge provision at the time, dragging Lloyds to a loss for the first quarter that year.

Colleagues suspected he wanted to set aside a generous compensation budget in the hope that not all of it would be needed. The surplus could then be released the following year to help prettify profits, one former colleague suggested. But the move rankled with rivals because it began a tidal wave of compensation, further casting Horta-Osório as the aloof outsider. “I’m not here to be popular,” he says in response.

One former Lloyds banker says Horta-Osório should have negotiated a compensation deadline before offering to pay, so that banks would not be forced to pay out for years to come. The costliest scandal in consumer finance history has to date forced Lloyds to set aside more than £17bn and the industry about £35bn. “I don’t have any regrets, because it was the right thing to do for customers and because it was absolutely the wrong product,” says Horta-Osório. 

There have been other difficult decisions. Horta-Osório will be remembered as a determined cost-cutter — essential in repairing Lloyds’ battered finances, but controversial in broader customer terms. Such is the scale of the job cuts, branch closures and other overhead reductions since he joined, that Lloyds now spends the least relative to its income of all the large UK banks. For every pound in revenue, only 47p is spent on operating expenses.

In his first few months at the bank, he announced more than 15,000 job losses. In 2014, he unveiled plans to slash another 9,000 jobs and close 200 branches by the end of 2017. He has since extended this to 12,000 jobs and 400 branches in total. The scale of the job cuts has been controversial, particularly in the context of his own aggregate remuneration, which has totalled £38m (including bonuses and subject to conditions) since he joined. 

The closure of branches, meanwhile, has left some towns without a bank. One such town is Fordingbridge, on the River Avon. Its last bank branch disappeared when Lloyds shut its doors in March. Dave Tree, who runs a local shop, said the disappearance of the bank ripped the heart out of the town. “It’s an ageing population here, there’s a high percentage of retirement homes, and they . . . will not migrate to online banking. So whilst there is a big inconvenience at a business level, at a local level there’s a bigger inconvenience. The next local branch is about five miles away.” 

This Lloyds branch in Fordingbridge, Hampshire, was closed in March; the town now has no bank
Lloyds has stressed that it still has the largest branch network in the country but is witnessing a rapid decline in the number of people visiting them, as more customers than ever before now use their mobile phones to bank.

The preservation of middle-England communities is not Horta-Osório’s concern. But he does visit a regional branch every six weeks. At a visit to Coventry in March, he asked one branch manager about its lending business and congratulated another on an award for customer service. Talking to employees on the ground is important, he notes, keen to highlight that he does not sit in an “ivory tower”.

In fact, Horta-Osório has few close relationships with colleagues. But he had to engage with them after his private existence was blown open last summer when he was pictured on the front page of several UK tabloids in public with a lover. He sent a letter out to his 75,000 staff a few weeks later, expressing “deep regret” for the impact the coverage of his personal life had had on Lloyds’ reputation. 

“I had lunch with him the first day back after summer,” says Frew. “I said, ‘How are you feeling? Does it feel weird?’ and he said, ‘No, I’m just going to be very open about it.’”

News of the affair capped a difficult few months. June’s Brexit vote was painful for Horta-Osório, an ardent europhile, in several ways. Most embarrassingly, it exposed a tension with his chairman, Norman Blackwell, who made a speech in a private capacity in favour of Brexit. This not only clashed with Horta-Osório’s own view, but appeared at odds with the interests of the bank. Lloyds’ share price was affected badly by the vote, as investors feared a downturn in the UK economy, in turn damaging Horta-Osório’s wealth. Still, he is in line to own up to 36 million shares in the bank. 

The Brexit vote also damaged his own outlook. A former colleague says he believes the Portuguese national took British citizenship in part because it would help pave the way for a possible knighthood. But that path would probably have relied on the continued sponsorship of Osborne and the former prime minister David Cameron, both quickly ousted from power.

The sale of the government’s stake in Lloyds is in stark contrast with RBS. While Lloyds is now reprivatised, the government has only sold a small portion of shares in RBS, at a loss, and still holds a 72 per cent stake. The scale of the task at RBS is much larger — unwinding the vast global bank conceived by former boss Fred Goodwin.

“But while it is easy to say António had an easier deck of cards to deal with than at RBS, Lloyds had its own challenges,” says Jim O’Neil, a Bank of America Merrill Lynch executive who previously oversaw the UK government’s shareholdings in Lloyds and RBS. “When he arrived, he was one of the few people who thought he could get the taxpayer’s money back. He always believed it could be done.”

Bank is free from government after 10 years but still has work to do

Reprivatisation brings its own risks. Without the protection of the government as a shareholder, Lloyds, which has more than a 20 per cent share of Britain’s retail banking market, may face a greater threat of being broken up on competition grounds — though Horta-Osório is sceptical. “I think that fear is completely unjustified,” he says. 

Another shadow is cast by the legacy of HBOS. Lloyds is under the spotlight for its handling of fraud claims at an HBOS branch in Reading during the financial crisis, which caused business customers to go bankrupt. Lloyds is set to start paying out about £100m in compensation later this month. 

Aside from the impact of Brexit, succession is the other “risk factor” worrying the bank’s investors. With the heavy lifting out of the way, some believe Horta-Osório may soon seek a challenge elsewhere. “He’s bored,” says a former colleague. People who know him well say he would love the chief executive job at HSBC, which is due to come vacant next year. 

Horta-Osório will not be drawn. “It’s never ‘job done,’” he says. “I like being here, and there’s lots to do here.”

He has learnt to pace himself, allocating a few hours a day to strategise, a ritual reflected in his passion for chess. “It [is] the most cerebral of games, which I think is very strategic, applies a lot to business,” he says.

He spends two hours every Wednesday playing tennis at the Queen’s Club. “I think you have to exercise to build your resilience,” he says. “This is a very demanding job . . . and you have to be fit mentally and physically.”

Whatever he does next, one thing looks certain. The Portuguese banker is unlikely to go home just yet. Though he owns a weekend home overlooking Lisbon’s deep-cut Tagus river, he is now on the hunt to buy a debut home in the UK. To pay for it, he’ll sell his first chunk of shares in the bank. He doesn’t expect to need a Lloyds mortgage. 

Lloyds: To bailout and back

© Lloyds Banking Group Archives
1765: Taylors & Lloyds opens as a private bank in Birmingham (pictured: Sampson Lloyd II, founding partner)
1852: The bank’s name becomes Lloyds & Company after the association with the Taylor family ends 
1884: Lloyds acquires Barnetts, Hoares & Co, bringing with it the black horse symbol 
1911: Lloyds ventures overseas for the first time, opening offices in Paris
1918: Lloyds buys Capital & Counties Bank, securing its position as one of the “Big Five” high-street banks 
1995: Lloyds acquires TSB to form Lloyds TSB Group 
2008: Lloyds steps in to rescue HBOS in September. A month later, government ministers unveil plans to bail out Lloyds, HBOS and RBS 
2009: Lloyds shocks the City in February by reporting £11bn of losses at HBOS. In May, chairman Sir Victor Blank is forced to step down. In December, the government pumps another £6bn into the bank, taking taxpayers’ stake to 43 per cent
2011: António Horta-Osório becomes chief executive in March. He breaks rank with other banks and sets aside £3.2bn for payment protection insurance mis-selling. He goes on leave in November
2012: Horta-Osório returns to work
2014: Horta-Osório announces 9,000 job cuts by the end of 2017; the number is later extended to 12,000
2017: Government recoups £20.3bn from Lloyds in April and sells out of the bank in May
Emma Dunkley is the FT’s retail banking correspondent. Patrick Jenkins is the FT’s financial editor. Martin Arnold contributed additional reporting

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