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Wednesday, 01 October 2014

Rest cure

Lloyds' plan A should be to retain current boss

The board of Lloyds Banking Group has been thrown a curveball. The UK lender’s chief executive, António Horta-Osório, is out of action having been signed off on medical grounds. In the eight months he has done the job, his performance has been mixed. What should the board do?

Clearly, it can’t make any assumptions. Horta-Osório is suffering extreme fatigue after putting his all into turning round the bank, says a person familiar with the situation. He is expected to be off for six weeks. But Lloyds cannot be sure right now that he will come back. Finance director Tim Tookey is acting as a stand-in chief executive. Chairman Win Bischoff should, as a precaution, be examining permanent replacements.

Bischoff’s job would be easier if his chief executive had performed either superlatively or terribly since taking over on March 1. But things aren’t so clear-cut.

Horta-Osório has had some bad luck. His June strategy review came days before the current phase of the euro zone crisis began in earnest. A 3.2 billion pound provision for payment protection insurance that affected all UK banks savaged Lloyds’ half-year results. Horta-Osório has also done some good off his own bat, reducing Lloyds’ reliance on UK government-guaranteed funding, and seeing off threats from the Independent Commission on Banking to make the bank sell more branches.

On the other side of the ledger, the strategy review was nevertheless mildly disappointing. Horta-Osório’s plan to slash Lloyds’ cost base by cutting 15,000 extra jobs by 2014 made sense. But his 12.5-14.5 percent return on equity target partly relied on assumptions of near-term rate hikes that have not materialised. And basing plans for top-line growth on cross-selling insurance products looked over-ambitious. Separately, Lloyds’ attempts to sell the 600 branches it has to in return for state aid look to have hit the buffers.

Shares in the bank, which is 41 percent owned by the UK taxpayer, fell 5 percent on news of Horta-Osório’s illness, having already tumbled more than 50 percent since he took over. Even so, with the talent pool for top bank executives fairly shallow, he is probably still the right person to lead the group. The best outcome for Lloyds and its dominant shareholder is that he comes back in due course and finishes what he has started.

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Context News

Lloyds Banking Group said on Nov. 2 that António Horta-Osório, its chief executive, was taking a temporary leave of absence from his duties due to illness. He is expected to return to his position before the end of the year.

Tim Tookey, the finance director, Has been appointed acting chief executive.

Horta-Osório’s contract entitles Lloyds to terminate his employment if he has been off work for over 26 weeks, according to a person familiar with the situation. He would then get six months notice, meaning he would in total be entitled to a year’s pay as of now.

Lloyds shares fell 5 percent in early trading. At 1130 GMT, they were trading at 29.4 pence, down 3.6 percent.

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