Lloyds Banking Group PLC (LYG) on Wednesday made two critical
decisions for the future of the bank, announcing the return Jan. 9
of its Chief Executive Antonio Horta-Osorio and disclosing that The
Co-operative Group has been chosen as preferred bidder for a
632-branch network being sold by the bank.
The 41%-government-owned bank had been in some disarray
following Horta-Osorio's sudden departure in November due to
exhaustion. The bank had always said it expected Horta-Osorio to
return to his post in the New Year, but the continuing uncertainty
over the company's future management had helped send shares to
record lows.
Shares were flat on the announcement and little moved in the
minutes following. The shares remained largely unchanged and closed
down fractionally at 24.07 pence, giving the company a market value
of GBP17 billion in a lower day overall for European
financials.
Analysts said that the reinstatement of Horta-Osorio, while
broadly positive, won't immediately alleviate concerns about
management quality at the bank.
"We'll only know a few months down the line if he's up to the
job," analyst Gary Greenwood at Shore Capital said. Greenwood added
that the decision to take certain responsibilities away from
Horta-Osorio and delegate them to his management potentially
dilutes management control.
Known in the business as a micro-manager, Horta-Osorio launched
an ambitious overhaul of the bank when he took up his post in March
this year. He expedited the sale of the bank's 632-branch network
as part of a wide-ranging asset disposal program and instituted a
broad costs-savings strategy.
On his return, and at his suggestion, Horta-Osorio will have his
workload lightened by the rest of management who will have more
power. This will prevent any recurrence of his exhaustion, Win
Bischoff, Lloyds chairman, said in a conference call.
"We believe he just overdid it and was exhausted - it was not
stress," he said.
"We believe, and he believes, that he is fully recovered and
that there will be no relapse," he added.
The bank's decision for Horta-Osorio's return was unanimous
after the board had received full clear and independent medical
evidence, Bischoff said.
Lloyds also Wednesday announced that it had chosen a preferred
bidder for a chunk of its retail network, which it is selling as
part of a broad disposal program to shed state aid, stabilize
profits and meet tough new regulatory capital requirements. Lloyds
will remain a significant player in the market with a network of
some 2,286 branches across the U.K. after the sale.
Both bidders, bank acquisition vehicle NBNK Investments PLC
(NBNK.LN) and The Co-operative Group, have both submitted offers
valuing the business at around GBP1.5 billion but with very
different structures.
The bank said that both bids had been of high quality but that
it came down to "execution risk."
"It was a difficult decision because of the quality of both
bids," interim CEO Tim Tookey told the conference call. "If I had
to put it down to one thing, it was the relative execution risk [of
the deal eventually being completed]. They are very different
entities and the Co-op is an existing player--it is already a
bank."
Analysts and industry experts have expressed concerns over the
ability of the Co-op to absorb a large retail network while it has
yet to complete the integration of the Britannia Building Society
that it bought in 2009. However, a spokesman for the bank told Dow
Jones Newswires that the integration of Britannia was on track and
ahead of budget in terms of its annualized costs savings.
The deal, if successful, will transform the Co-op, tripling its
size and giving it a presence in Scotland and the suburbs of many
U.K. cities where it doesn't yet operate. It is understood that any
job losses will be limited to the margins.
"We have a clear strategy for driving The Co-operative Group
forwards. As part of that, we have been working to build upon our
strong foundations in banking to ensure customers have a real
alternative on the high street," said Peter Marks, Group chief
executive of The Co-operative Group.
"We think a combination of these branches and our own would
significantly strengthen our position as a real challenger in
relationship banking in the U.K.," he added.
Both Lloyds and the Co-op stressed that further due diligence
needed to be done before a deal was signed. Tookey said the bank
would give a further update by the end of the first quarter 2012.
He also said that the bank was keeping the IPO option alive.
JPMorgan Chase (JPM) and Citigroup (C) are running the auction
process for Lloyds. BarCap and Credit Suisse Group AG (CS) are
advising the Co-op.
The bank has until the end of 2013 to complete a sale of the
business to comply with the EU Commission rules.
NBNK expressed its disappointment at the outcome and that the
U.K. had lost an opportunity to have a new player in the high
street. "The company regrets that it was not given the opportunity
to create a break with the past, delivering to the high street a
well-capitalized, new challenger bank and brand devoted to
providing the level of service that U.K. banking customers
deserve," NBNK said.
NBNK was created specifically to acquire banking assets and
introduce a new competitor in the U.K. market but has now lost out
in two auctions. It failed to secure nationalized lender Northern
Rock, which was bought by Virgin Money last month.
The much-larger Lloyds' retail network had always been a
priority for NBNK, but without Northern Rock it was always going to
be more difficult for NBNK to secure the 6% market share of current
personal accounts thought necessary to be an effective competitive
challenge to the big banks.
The package being sold by Lloyds makes up 4.6% of the U.K.
market and "is on the borderline of sub-scale banks that have
failed to grow significantly in the past," the Independent
Commission on Banking said in a September report on reforms in the
banking sector.
The ICB, which publishes its final report Monday, said that an
entity with 6% market share would "ensure the best possible chance
of becoming a strong, effective challenger."
NBNK said Wednesday it would consult with its investors and make
further announcements in due course.
-By Marietta Cauchi, Dow Jones Newswires; +44 207 842 9241;
marietta.cauchi@dowjones.com
(Jessica Hodgson contributed to this article.)
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