Fraud case and falling share price take shine off Lloyds’s farewell to taxpayer
When Lloyds Banking Group last week finally accepted responsibility for compensating the small business customers who were victims of a £245m fraud involving HBOS Reading, it was again forced to face up to the nasty surprises that lurk inside the once fast- growing bank it took over during the 2008 crisis.
As the judge sentenced former HBOS Reading manager Lynden Scourfield and five associates to more than 47 years of combined jail time, he described him as “utterly corrupt” and driven by “rapacious greed” uncovered after an investigation by Thames Valley police. Anthony Stansfeld, police and crime commissioner of the local force, pointed out that the fraud “either displays complicity or incompetence, a lack of corporate governance, complacency, and an absence of proper safeguards”.
While this is the only HBOS operation where fraud has been prosecuted, the lurid stories the jury heard about sex parties and cash in brown envelopes embellished its image as a bank whose ambitions had got out control.
A 2013 parliamentary report described HBOS as an “accident waiting to happen”; in 2012, the now defunct Financial Services Authority lambasted subsidiary Bank of Scotland’s aggressive, high-risk growth strategy, and another report, published in 2015 by the Bank of England and the Financial Conduct Authority, said the bank’s business model “placed inappropriate reliance on continuous growth without due regard to the risks involved”.
The culmination of the four-month trial in Southwark Crown Court of Scourfield’s associates – he had pleaded guilty earlier – came as the turnaround story of Lloyds almost reached its own conclusion. The jury returned its decision just as the taxpayer stake in Lloyds dropped below 5% (down from the 43% it had been at the height of the crisis).
If the Treasury keeps selling its shares in tranches at the same rate, Chancellor Philip Hammond should be able – probably in May – to finally extricate the taxpayer from the bank after eight years of ownership.
Certainly the bank’s chief executive, António Horta-Osório, would rather be focusing on preparations for the financial results for 2016 in a fortnight and the prospect of taxpayers getting back the £20.3bn that was used to buy shares in Lloyds TSB and HBOS, once they were combined to prevent the enlarged bank collapsing.
That Hammond is on the brink of being able to make such a claim makes a stark contrast with his prospects of selling the government’s 73% stake in Royal Bank of Scotland, and comes after a tumultuous period for Lloyds, punctuated with reminders about the troubles inside HBOS.\
The Halifax Bank of Scotland combination existed for just seven short years after the former building society merged with the Edinburgh-based bank in 2001, embarking on a mission to create a new force in the UK financial sector.
HBOS was a hotshot lender. It devoured deals even as others were pulling back, often in commercial property, and not just in the UK but in Ireland and Australia too, where among the more quirky investments that have been sold off is a 16-metre-high pineapple-shaped tourist attraction in Queensland.
In the UK, Peter Cummings, who ran the Bank of Scotland corporate lending arm, had a list of clients that included Sir Philip Green during his ill-fated bid for Marks & Spencer in 2004. The 2015 BoE/FCA regulatory report outlines the complexities of the lending operations: the HBOS-backed buyout of house builder McCarthy & Stone included the property moguls the Reuben Brothers and Scottish entrepreneur Sir Tom Hunter, who had also been involved with buying 220 pubs and Travelodge. HBOS and Hunter also bought construction company Crest Nicholson.
Once the corporate lending business started to unravel, the costs were startling. According to the 2015 report, HBOS took £52bn in charges for bad debts and poor investments between 2008 and 2011 – more than RBS.
When the HBOS deal was announced in the febrile atmosphere that gripped global stock markets in the days after Lehman Brothers collapsed in September 2008, it was known that the lender was in trouble but it initially looked as if the cards were stacked in the favour of the Lloyds management.
A combination of two giants of the high street would ordinarily have been subject to an investigation by the competition authorities, but then Lloyds chairman Sir Victor Blank famously secured assurances from prime minister Gordon Brown at a City cocktail party that this would be averted.
Even though the EU later forced Lloyds to spin off 600 branches – they use the TSB brand and are now owned by Sabadell of Spain – the combined business still dominates the UK banking industry. In a move that helps play down its prominence, Horta-Osório runs the operation through a number of brands – including Halifax and Bank of Scotland – on the high street.
He has also closed branches while putting the Lloyds and HBOS operations together, and then pared back costs to bolster profits, including swingeing jobs cuts – some 57,000 since 2008.
But cost-cutting is loved by the City and Ian Gordon, banks analyst at Investec, points out that the profit the government made on selling a tranche of its Lloyds shares two years ago, when they were trading above the 73.6p average price paid for them, means Hammond can now sell off the remaining stake at prices below break-even.
“If you turn the clock back two years, there was a period when the market thought that Lloyds did not have any more PPI [payment protection insurance compensation to make provision for] and that it [the bank] was going to grow. Both those assumptions were wrong,” said Gordon.
The bill to compensate customers for PPI misselling was put at £3.2bn when Horta-Osório first tried to tackle this scandal in 2011, but it has since grown to £17bn – and left the industry as a whole with a bill of twice that.
Selling off the final chunk of shares at a loss may take some of the shine off the government’s exit – although the 2016 results could put a rocket under them if they beat expectations. The celebrations may also be overshadowed by questions about the long-term price of bailing out the industry.
George Osborne, Hammond’s predecessor, may also be disappointed. He harboured ambitions of selling cut-price shares to the public. There will, however, be no such coda to the government’s intervention in a bank that is still tackling its toxic legacy.
A busy five years for the boss
Six months after bring lured to run Lloyds from the UK arm of Santander, António Horta-Osório was all but written off by the City when he took time off to recover from fatigue.
When the Portuguese banker’s temporary leave was announced in November 2011, the share price plunged to below 30p and there were doubts he would return to the bank’s headquarters on London’s Gresham Street.
However, when Horta-Osório did get back to work, he shed some light on what had stopped him sleeping for five consecutive days, telling the New York Times about his fears for Lloyds – which had £300bn of debt, half of which was on very short repayment schedules. The eurozone crisis was putting investors off banks. But Lloyds is now no longer reliant on the debt markets for funding, in part helped by cheap money from the Bank of England’s liquidity schemes.
Other problems have proved costly to solve: as well as the £17bn bill for payment protection insurance misselling, the bank has also paid multimillion-pound fines to regulators, including £28m for using a bonus scheme that put staff under so much pressure to meet targets that they sold products to themselves, and a £226m fine for rigging Libor.
As the government prepares to sell off its last remaining shares, Horta-Osório will be hoping that his decision to rein in the bank’s international ambitions (it now operates in six countries rather than 30), focus on the UK and build up a credit-card business does not deter investors in the post-Brexit world. Last year as he wrote to staff apologise for revelations about his private life and the damage they caused to the group’s reputation, he pledged his commitment to the role. But the taxpayer’s exit may spark talk of his now leaving – he has been linked with top jobs at HSBC and Italy’s Unicredit or even a political career in his native Portugal.
But breaking free of the British taxpayer means that a bonus – worth up to £850,000 -promised to him in 2015 is likely to be released next year. That is part of the £34m he has already been paid, and the £6.5m he is expected to receive for 2016. JT