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Divorce for Scottish Widows?

Douglas Fraser | 16:10 UK time, Monday, 25 April 2011

With a company as sprawling as Lloyds Banking Group, there are any number of options for the full review being carried out by the new chief executive.

Antonio Horta-Osorio has already got 600 branches on the market, as required by the European Commission in exchange for approval for the massive wad of state aid that was the bailout.

Nearly a third of them are Lloyds TSB Scotland, and one of his first announcements after moving across from Santander was to acclerate that sale process.

The Independent Commission on Banking has vaguely warned in its interim report that that 600-branch sell-off should be "substantially enhanced", as a means of boosting the amount of competition in Britain's retail banking market, nearly a third of which is in Lloyds' hands.

No-one can say quite what that means, and when it might be required.

The bank is facing requirements for higher capital buffers.

And add to that the UK Government wondering when and how it might sell its 43% stake, to which end it would rather like Lloyds' stock price to rise comfortably above its paper profit threshold.

That's a long way off, at 123 pence, while the bank closed last week below 60 pence.

Market conditions

That's just the political and regulatory environment, before the new team at the top of Lloyds get to grips with the market conditions it's facing, and its strategic direction.

This, after all, is a company still working through voluminous amounts of integration of Lloyds TSB with Halifax Bank of Scotland.

And there are those who reckon it's still got some way to go before the full value from the integration of Lloyds Bank with TSB and Halifax with Bank of Scotland are realised.

It doesn't have much chance of being allowed to grow its share of Britain's retail market.

It doesn't seem well placed to get any more international, while it remains chastened and under the eye of the government, which owns 41%.

So what does it do? According to one report today, it sells Edinburgh-based Scottish Widows for more than £5bn.

Why would it do this? That's not quite so clear from the press report, and Lloyds Banking Group isn't commenting.

It's not apparent that Scottish Widows is under-performing. Indeed, it's contributing rather handsomely to Lloyds' profits.

A big mouthful

It would be a significant retreat from the model Lloyds and others have developed of offering (and sometimes hard-selling) a full range of retail services - including, in the case of Scottish Widows, life assurance, pensions and investments.

The merger of Lloyds TSB and HBOS has already seen off the former HBOS asset management division, Insight Investments, with a part of it sold and the rest integrated into the rest into Scottish Widows Investment Partnership.

That's the operation that handles Scottish Widows assets, but which is run separately from insurance as part of the wealth division.

It's in that division you'll find another HBOS legacy, St James's Place wealth management, which is also being named as a possible billion-pound sell by Horta-Osorio.

The other part of the equation, of course, is figuring out where the buyer is and what money is available.

Clive Cowdery's Resolution is being named as the insurance industry aggregator most likely to bite, as it's been swallowing up bits of the industry that become available.

Scottish Widows would be a big mouthful.

But it's worth remembering that Royal Bank of Scotland is also out there in the market-place, selling off its insurance division.

With a lack of buyers evident, that looks most likely to be floated.

And any attempt by Lloyds to put its own insurance business into the market is likely to depress prices for both big banks.

A bit boring

So how will Antonio Horta-Osorio make his mark, with the strategic review we're told he'll deliver in June?

With a splash? Selling off businesses, and shedding market share - some of that in response to political pressure/requirements - while focussing the bank much more narrowly?

Or getting his head down with the continued business of integration, focussing on customer service, and getting the share price up to keep his dominant shareholder happy?

Only once that government stake has been sold will he be truly free to review and to set out a strategy of his own making.

Anyway, wasn't this supposed to be the time for banking to become a bit boring again?

Update: I stand corrected, which is the only time I've ever had reason to be grateful to a fruitmachine.

The break even point for the UK Government is lower than I stated. It originally stood at 122.6 pence, after the first tranche of bail-out capital. But under the terms of the Asset Protection Scheme and after the rights issue announced in November 2009, in which the UK Government took its 43% share, the average price at which the taxpayer had invested in Lloyds Banking Group fell to 63 pence.

The investment's still underwater, but in need of a snorkel rather than scuba gear.


  • Comment number 1.

    I think your cost per share figures are completely inaccurate: The cost to the taxpayer is 72.2p per share, or 63.2p per share if the fee for the implicit capital support provided by the in principle terms of the APS are taken into account.

  • Comment number 2.

    Why do we always talk about the cost to the taxpayer in the same breath as the Government's share? We should remember that the Government owns 43.6% and the taxpayer now only owns 56.4% compared to the 100% before the bailout. It was private investors (taxpayers) and pension schemes (acting on behalf of taxpayers) that owned the majority of the bank before the crisis hit. It was then the taxpayer not paying back loans that resulted in the crisis that meant that the Government had to get involved to prevent a similar situation to Iceland. As taxpayers do we own the second homes of MP's or are we responsible for filling in the potholes covering the country's roads?
    I am a taxpayer and own Lloyds shares, some of these were acquired when the price was nearer £5 or possibly higher. I have a right not to be happy and certainly with the fact that the Government has put on hold any dividends that can be paid out. If Lloyds and RBS were alllowed to pay out dividends from their new profits then everyone could benefit and share prices would rise.


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