Lloyds' vision for the future

WHEN Portuguese-born Antonio Horta-Osorio unveiled his new strategy for Lloyds Banking Group to the City and media last week he must have felt right at home. After all, as a keen scuba diver in his spare time, he has been known to swim with sharks.

The City had largely extended him the benefit of the doubt in his "first 100 days" since taking over from his predecessor, "the quiet American" Eric Daniels, on 1 March. But now it was crunch time.

From outside the ninth-floor eyrie at Lloyds' City headquarters where the new chief executive held court, the waiting media pack had a good view of the ongoing construction of the towering Shard building, which will dramatically dominate London's skyline.

Horta-Osorio's blueprint had its own brutal drama with 15,000 extra job cuts at the core of a further 1.5 billion of cost-cutting.

The figure takes up to 43,000 the jobs Lloyds will have shed since it rescued HBOS from the bad debts knackers' yard in 2009. Unsurprisingly, the unions were livid.

David Fleming, national officer of Unite, said the further bloodletting of a workforce still reeling from previous cuts will cause "deep distress and anxiety". The bank's protestations that about half the cuts could be achieved through "natural attrition" fell on stony ground.

However, as befits a cosmopolitan banker from a family of distinguished lawyers, the new chief executive's performance was assured and delivered in flawless English.

He is a shrewd public relations operator, too, happy to play the national interest card. He told the audience that he regretted the job losses but they were necessary not just for Lloyds to recover profitability, but also to help revive the anaemic UK economy.

Similarly, when he said he aimed to revitalise the "irreverent, entrepreneurial" Halifax brand and was comfortable with it "cannibalising" Lloyds TSB's business, it sounded very much like he was playing to the competition concerns of the Independent Commission on Banking.

"We should have the courage to attack ourselves," he said, with some Iberian panache. A new advertising campaign for the Halifax brand will roll out in September.

A key thrust of Horta-Osorio's wider vision is to retreat sharply from Lloyds' spotty international presence, reducing its footprint from 30 countries to under 15. When one of Horta-Osorio's questioners said he was surprised to learn that the bank was in so many countries in the first place, given that it is regarded as a heavily UK-centric bank, the new boss joked: "You are not the only one."

Lloyds main foreign operations, inherited from HBOS, are in Ireland and Australia. But it is also in a host of other countries, sometimes at seemingly little more than flag-planting depth. These include Germany, the Netherlands, the United States, Japan, Hong Kong, Singapore, Switzerland and Dubai.

The bank will not yet be drawn on which countries it will exit between now and 2014, but Horta-Osorio has already proven himself to be a fast decision-maker and the City expects a further announcement sooner rather than later.

The new boss has brought forward the sale of the 600-plus branches the bank is required to sell off by the EU as a condition of the taxpayer bailout. And one of his first moves at the helm was to make a bigger than expected 3.2bn provision for Lloyds's historic mis-selling of personal protection insurance (PPI) policies.

However, bank sources suggest even though the partial overseas withdrawal will account for some of the job cuts, the bulk will be in Britain. They will be mainly in middle management and back office, with customer-facing staff pretty bullet-proof, sources say.

Another winner from the new strategy is Edinburgh-based life assurer and fund management group Scottish Widows. Some had speculated the new boss would sell Widows to quickly beef up the balance sheet. But Horta-Osorio was gushing about the "iconic" Widows brand and its cash-generating possibilities as the spearhead of the group's insurance operations.

Widows has a healthy 10 per cent market share of new insurance business. But only 2.1 million of Lloyds bank customers buy its products out of an eligible 17 million. As part of its ramped-up UK drive, the bank aims to boost this by 50 per cent to 3.2 million Widows customers by 2014.

One analyst said: "Overseas overdone, bancassurance good. They are two of the main takeaways from this review. It is also easier to understand in terms of its simplicity than the recent new strategies from HSBC and Barclays."

Horta-Osorio claimed cost-cutting - where 111 savings initiatives were identified - was only half the story. He said it will allow 2bn to be reinvested in the core business by 2014, with Halifax, Widows, business lending and wealth management set to get a sizeable slice of the pie.

Fortunately for Horta-Osorio, the stock market's reaction to his strategy has been positive. Shares in the 41 per cent taxpayer-owned bank jumped nearly 10 per cent on Thursday when it was unveiled, the biggest one-day gain in a year. Another 3.7 per cent per cent gain was added on Friday, as the stock closed at 50.81p.

Bruce Packard, analyst at Seymour Pierce, said the review "all looks sensible" as it offered "better value products and a lower but more sustainable RoE (return on equity] than history".

Brokers at Killik & Co also responded: "Overall, we see the strategic review as being very positive for Lloyds."

But some in the Square Mile pointed out that the reaction to Lloyds' shares was a little surprising given that Horta-Osorio gave himself wiggle room on the restoration of a dividend. The bank has been banned by the EU from paying a dividend until January 2012. The party line is that Lloyds will also consider the economic environment and how far new regulatory capital requirements have been met before deciding when to reinstate payments.

Horta-Osorio suggested this was sensible given the two jokers in the pack that could derail things: a double-dip UK recession (which he does not expect) and contagion from the Eurozone's sovereign debt crisis.

He also says retaining capital strength is important to give the government the option to start selling down its taxpayer stake in the bank as soon as possible. But even with last week's share price gains, there is still some way to go, as the taxpayer will only start to make a profit once the shares exceed 63p.

Many analysts praised the clarity of the new strategy, but some said it was "essentially conservative". One analyst said: "He's put his mark on the group, for sure. Yes, Lloyds' flag will be tied even tighter to the UK mast, but with the market shares HBOS has given it in current accounts, deposits, mortgages, etc. that is no bad thing."

However, Alex Potter, banking analyst at broker Berenberg, typifying those who are underwhelmed, says: "Gradualism is sensible but hardly sexy. We see these savings as attainable but undemanding - a gradual improvement."