Bloomberg News

Lloyds Must Detail Cuts to Avoid Investor Day Flop, Analysts Say

June 23, 2011

June 24 (Bloomberg) -- Lloyds Banking Group Plc Chief Executive Officer Antonio Horta-Osorio should spell out how and when he’s planning to cut costs when he briefs investors next week, after rivals at HSBC Holdings Plc and Barclays Plc failed to do so, analysts say.

Horta-Osorio will become the third British bank CEO appointed this year to tell shareholders about his plans when he speaks. HSBC has dropped 8.4 percent since Stuart Gulliver spoke on May 11, while Barclays is down 8 percent following a presentation by Robert Diamond on June 15.

The key to success is for Horta-Osorio to explain that “‘we’re going to do X amount of cost cutting over this period, this is where the underlying profitability is going to go, and this is how we’re going to make it,’” said Simon Maughan, head of sales and distribution at MF Global Ltd. in London. “He’s got a great chance to impress the market, because the competition has been so poor with their investor days.”

Lloyds share price has tumbled 27 percent since the U.K.’s Independent Commission on Banking recommended in April that the lender “substantially enhance” asset sales agreed with the European Union following its 20 billion-pound ($32.4 billion) government bailout. Horta-Osorio, who took over on March 1, will say he’ll focus on units generating higher returns and take capital from less profitable divisions at the June 30 investor day, according to a person with knowledge of the plans.

Market ‘Raspberry’

U.K. banks are reviewing their operations as regulators enforce higher capital requirements to prevent a repeat of the 2008 financial crisis. Gulliver, 52, said that HSBC will target cost cuts of as much as $3.5 billion by 2013 and reallocate capital to fast-growing units, reduce head office jobs and sell its U.S. credit card division. Diamond, 59, said Barclays plans to make cost savings of at least 1 billion pounds and generate additional revenue of as much as 6.4 billion pounds by 2013.

“HSBC and Barclays had very aspirational targets but they were both a bit thin on detail,” Maughan said. “Barclays basically came in and said ‘We’re going to improve our cost- income ratio by improving revenue,’ to which the market blew a raspberry.”

Some investors and analysts question the purpose and utility of banks’ public discussions of strategy.

“Investors shouldn’t expect anything too revolutionary from Lloyds,” said Joe Dickerson, an analyst at Espirito Santo Investment Bank in London. “Banks shouldn’t be in the business of providing long-term forecasts. Because banks are so tied to the macro economy, it’s very hard for them to say what they are going to earn in 2014-2015.”

Regulatory Uncertainty

Given the regulatory and economic uncertainty “it’s very difficult for banks to say anything of very much interest,” said Julian Chillingworth, who helps manage about 15 billion pounds, including Lloyds shares, at Rathbone Brothers Plc in London. “Banks are very dependent on what is going on in the macro environment and that is quite uncertain. It’s difficult, given that, to say anything too dramatic about future profitability.”

Some analysts said that HSBC’s and Barclays’ investor presentations were useful, with Investec analysts saying HSBC’s strategy day presented “clear, time-stamped, performance targets.”

Spokesmen for Barclays and HSBC declined to comment on the response to their investor days.

At the time of the Barclays presentation, the bank’s targets were described as “ambitious” as it faced “many challenges” in reaching its goals, according to analysts including Alex Potter at Berenberg Bank. HSBC’s investor day contained “little revolutionary,” Mark Phin, a London-based analyst at Keefe, Bruyette & Woods Ltd.

Branch Sales

Since taking over from Eric Daniels at the 41 percent government-owned bank, Horta-Osorio has hired at least four executives from his former employer, Santander U.K. Plc. He appointed Juan Colombas as chief risk officer, Antonio Lorenzo to take over Lloyds’s consumer and marketing units and Matt Young as corporate affairs director and member of the group executive committee. Alison Brittain joins from Santander U.K. as group director for the Lloyds TSB and Bank of Scotland consumer banks in September.

The bank’s net interest margin, the difference between what’s earned on loans and what’s paid on deposits and funds, is likely to narrow as the bank weans itself off government funding, Dickerson wrote in a note to investors this month.

Horta-Osorio accelerated the sale of the 632 bank branches, which make up about a 5 percent of the U.K. checking-account market. He’s also broken ranks with British competitors in coming to a settlement with the Financial Services Authority on the mis-selling of payment protection insurance, provisioning 3.2 billion pounds to cover the potential cost of claims, the most of any British bank.

July Meeting

Lloyds became the U.K.’s biggest mortgage lender and provider of checking accounts after its 2008 acquisition of HBOS Plc. It’s also more reliant on the British economy than its peers, with the U.K. accounting for about 88 percent of assets.

Lloyds says it doesn’t want to sell any more assets than those it agreed with the EU and the former Labour government in 2009. Horta-Osorio may meet ICB Chairman John Vickers as early as next month to discuss asset sales before the commission’s final report, according to a person with knowledge of the situation. That’s due on Sept. 12.

Lloyds will post a 1.47 billion-pound loss in 2011, according to the median estimate of 18 analysts in a Bloomberg News survey.

The bank has ruled out a sale of its Scottish Widows insurance unit as part of the review, two people with knowledge of the matter said last month.

--Editors: Francis Harris, Jon Menon.

To contact the reporter on this story: Gavin Finch at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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