AT LLOYDS, A BANK AND ITS BOSS ON THE REBOUND
c.2013 New York Times News Service
António Horta-Osório was eight months into his new job as chief executive of the Lloyds Banking Group in 2011, wrestling with a plan to refocus the British lender, when he stopped sleeping.
At the time, the British economy was shrinking, and Lloyds, which had already received a government bailout, was facing serious financing issues. It was then that Horta-Osório checked himself into a London clinic, suffering from stress and exhaustion.
Since then, Horta-Osório has rebounded, as has the British economy and the bank itself. After returning to Lloyds, he helped turn the bank into one of the biggest postcrisis success stories in the industry here. Its share price has almost doubled since the beginning of last year, the strongest performance among major British banks.
During a recent interview, Horta-Osório attributed the bank’s success to its decision to focus almost exclusively on Britain, where the economy is now one of the fastest-growing in Europe.
“Lloyds was incredibly weak 2 1/2 years ago,” he said. “I had to make a choice where to allocate my scarce resources, and I thought it would make most sense to concentrate them all where we could be strongest, which is in the U.K.”
After the industry’s excesses of the last decade, Lloyds sought a 17 billion pound government bailout in 2008, equivalent to $28 billion at current exchange rates. Now, Horta-Osório is making the 248-year-old bank the largest lender in the country. Lloyds, he said, should become the British version of Wells Fargo, the U.S. bank that avoids risky, Wall Street-style bets and is the biggest mortgage lender in the United States.
So far, the efforts have paid off. In September, Lloyds’ shares became the first of two bailed-out British banks to recover enough for the government to start selling its stake. The government still owns a third of the bank, compared with its 80 percent holding in the other rescued lender, the Royal Bank of Scotland.
But clutching too tightly to a single economy can be risky. Some analysts have warned that Lloyds’ exposure to Britain and its growing mortgage market leaves the bank vulnerable to a possible property bubble. And Lloyds continues to incur its share of fines and penalties from regulators. Britain’s financial regulator fined the bank 28 million pounds this month for encouraging employees to sell unnecessary products to meet sales targets and win bonuses.
Ian Gordon, an analyst at Investec, said Horta-Osório deserved credit for turning Lloyds around even as other European banks were still struggling.
But before he could fix Lloyds, Horta-Osório had to fix himself.
When he arrived at Lloyds, Horta-Osório, a 49-year-old native of Portugal who enjoys scuba diving with sharks, was hailed as a superstar. Horta-Osório, a former Insead and Harvard Business School student, had just turned the British unit of Santander, a Spanish lender, into one of the biggest retail lenders in Britain and a serious rival to Lloyds.
But he said that he felt increasingly alone in making difficult decisions about Lloyds’s own financing, which was too reliant on short-term funding. He had picked senior managers, some from Santander, to help him, but they had not yet arrived.
He kept certain problems, such as the funding issue, to himself because making them public would have been counterproductive. But as a result, “you have to take important, difficult decisions on your own,” he said. “Leadership is a lonely thing.”
“In the end, I couldn’t really sleep for three days,” he said. “You feel like you don’t function anymore because you cannot recharge your batteries.”
With the help of some medication and nine days at the Priory Hospital, a clinic where cellphones are not permitted and former clients include the fashion model Kate Moss and the musician Eric Clapton, he recovered. Since that six-week leave, he sets aside one hour each day to think and deal with any issues that have emerged during the day.
“Maybe the biggest lesson I took is that nobody is a superman,” he said. “We’re all human and we all have our weaknesses.”
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When he heard that Hector W. Sants, a former head of Britain’s main financial regulator, took a leave of absence in October from his role as head of compliance and government at Barclays, citing exhaustion, Horta-Osório called him to offer support. Sants has since resigned from his post at Barclays.
Horta-Osório said being open about suffering from such levels of exhaustion should be considered a sign of strength, not weakness.
That he returned to his job and achieved the ensuing results, he said, “speak for themselves.”
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Lloyds has exited 21 countries since 2011. Even though the bank never had large trading or investment banking operations, it reduced its less liquid, troubled or nonstrategic assets to about 66 billion pounds from 162 billion pounds two years ago.
Horta-Osório has been well compensated in return. After forgoing a bonus of as much as 2.4 million pounds for 2011, he earned 3.4 million pounds for 2012, including a bonus of 1.5 million pounds.
Gordon, the analyst at Investec, praised Horta-Osório’s timing when it came to selling some of the troubled assets. The sale in May of a portfolio of real estate-backed securities to some American investors, including Goldman Sachs, generated a pretax income of 540 million pounds. After writing down the portfolio’s original value by 3 billion pounds, Lloyds valued it at 2.7 billion pounds and sold it for 3.3 billion pounds.
And Lloyds has been increasing its lending to companies this year, even as lending across Britain continues to decline.
Horta-Osório was betting that by focusing on Britain and lending to consumers and small businesses, the backbone of the British labor market, the bank would help the economic recovery. In turn, a stronger British economy would help Lloyds’ earnings and share price, while also keeping the government happy. In the third quarter, the bank’s profit surged 83 percent, to 1.5 billion pounds, as it continued to reduce costs and the quality of its loans improved.
George Osborne, the chancellor of the Exchequer, who has publicly chided the Royal Bank of Scotland for sticking to its foreign operations, could not have written a better playbook for Lloyds. Horta-Osório and Osborne get along well. Osborne traveled with him to Lloyds’ offices in Birmingham in September to thank management and staff for their work.
Analysts, including James Chappell at Berenberg Bank, said that Lloyds was likely to remain investors’ favorite British bank as uncertainty about RBS remained and growth expectations for Britain picked up.
But Horta-Osório is the first to acknowledge that his strategy comes with certain risks. About 95 percent of Lloyds’ assets are now in Britain, where the economy has been improving but growth remains modest. Lloyds has been one of the biggest beneficiaries of government-supported lending programs, and its large mortgage book could sustain losses if home values were to fall.
The bank is also struggling with legacy issues, including wrongly selling a certain insurance product, called payment protection insurance. Lloyds is by far the biggest culprit among the British banks that are being ordered to compensate customers for that product, and analysts expect the 8 billion pounds it has set aside to increase.
But Horta-Osório said none of that was causing him sleepless nights. “We built a bank that is low on risk and low on costs, focused on retail and small- to medium-sized businesses,” he said. “It’s good for sleeping.”
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The challenge is make the bank exciting enough for investors to allow the government to continue selling its stake. He is in discussions with regulators to allow the bank to pay a dividend, and he hopes to announce one in February. Some analysts and investors expect the government to continue selling its stake in Lloyds shortly after that.
To reach his goal of increasing Lloyds’ share of small-business lending to 25 percent from 21 percent, the lending unit now reports directly to him instead of to Lloyds’ corporate division head. And he is traveling to a different part of the country every month to visit branches and have breakfast with local business customers.
All that means he is working 12-hour days and has a firm grip on the bank. But he denies being a control freak, a reputation he earned in his early days at Lloyds when he eliminated some management layers and had more people report directly to him.
“As the bank is doing better and better, you will see me become more and more decentralized and more and more relaxed,” he said. “But I want to know the numbers in detail because that’s my obligation, not only as a chief executive but also to avoid problems in the future.”