Black Beauty: A Recovering Quadruped

Most of this article rings somewhat true but to me it indicates to the way I think i.e. the management is sound and their turn will come around in the cycle.

At the beginning of the year it looked likely the sector darling, RBoS, would make 20 quid - it hasn't and to my mind does not look like doing.

On the other hand we have seen insurance/assurance companies slowly re-rated over the year - saving seems to be coming back in vogue.

Just how did the black horse turn into the banking world’s donkey?

LloydsTSB is now showing slow, steady growth but it still hasn’t silenced its critics

By : Ben Marlow December 18, 2005



LLOYDS TSB was once a global banking giant. Created in 1995 after the merger of the TSB Group and Lloyds Bank, the newly-formed Lloyds TSB was the largest bank in the UK and Europe. Through strong growth in the UK retail market and well-established overseas operations, the group grew to become the world’s top-rated bank by 1998.

How times change – Lloyds has lagged far behind the growth of fellow UK banks that it has slumped to fifth in the UK rankings by market capitalisation. It is now recognised as a rather ordinary mid-sized European bank rather than one of the big boys. Seven years ago its shares were above 900p yet today they hover between 450p and 500p. So what went wrong and how has the once galloping black horse been transformed into the UK banking sector’s donkey?

Its UK peers – HSBC, Royal Bank of Scotland (RBS), and Barclays – have transformed themselves into international firms. HSBC has become a true global player and Royal Bank of Scotland has expanded internationally through some mighty acquisitions. Barclays is aiming to get half its revenue from abroad and Halifax Bank of Scotland (HBOS) has built up a successful multi-brand model that is quietly pinching customers from competitors.

Lloyds, on the other hand, stands accused of sitting back and watching its competitors propel themselves forward. In some cases it has done the opposite of its peers. Lloyds has drastically reduced its foreign presence in the US, Latin America and Australiasia, preferring to focus on growing at home in markets that provide steady but far from high-digit growth. Its reliance on domestic growth is lambasted by analysts who warn that a slowdown in the UK economy would leave Lloyds over-exposed.

Lloyds attempted to move out of its traditional banking fiefdom in 1999 through the acquisition of Scottish Widows Life Assurance, for which Lloyds paid a whopping £7bn in 1999. But this is judged to have been poor value for money. Former chief executive Peter Ellwood bought Widows at the top of the market and it has since proved to be a huge drain on the company’s capital.

Widows was hit with an FSA charge of £1.9bn for mis-selling racy investment products together with concurrent years of huge provisions for mis-selling various other savings and investment products. This has led to constant calls for Lloyds to dispose of Widows, though management seems stubbornly intent on pursuing the bancassurance model.

But to its credit Lloyds hasn’t shoved its head in the sand nor its fingers in its ears. The bank has installed a supposed management “dream team” in a bid to tackle its shortcomings and a slow transformation is occurring at one of Britain’s oldest high street banks. Its trading update released earlier this month was encouraging though far from inspiring. Chief executive Eric Daniels is beginning to deliver on his promise of revenue and earnings growth, most notably in business and corporate banking. The bank has extracted £800m of surplus capital from Scottish Widows. The extra capital will help to underpin the group’s attractive 7% dividend yield, which compares to a sector average of between 3% and 4%.

But its current approach of slow and steady growth has not silenced its critics. Analysts use words such as boring, uninspiring and conservative to describe the Lloyds of today. Observers say the bank lacks a clear strategy. It relies on the mature UK retail banking market for 50% of its profits. While growth in mortgage lending has been good, Lloyds is experiencing a slowdown in volumes in unsecured lending where it has huge exposure.

It has also taken another massive provision for endowment mis-selling. There still appears to be no clear plan just as the outlook for consumer lending becomes ever more uncertain and the competitive landscape increasingly challenging.

Perhaps the most compelling reason for owning shares in Lloyds TSB is its status as many analysts’ favourite banking takeover target. Its pedestrian attitude and uninspiring growth leaves it vulnerable to an approach, some say from a US bank.

Commentators point to Bank of America, which is keen to expand abroad due to regulatory constraints imposed domestically. Its share of the US retail market means it is unable to grow further at home. But despite constant speculation, a bid has failed to emerge.

Industry observers simply point out that Lloyds has little that would make it attractive to a predator.

Shares in Lloyds TSB present a slow steady growth prospect at best, providing the UK economy holds up. But there are a number of other more exciting stocks deserving of your hard-earned money where earnings are far more diversified.

One analyst suggests switching to RBS or HBOS, though he adds “you could probably make money switching from Lloyds TSB into most banks”.