Awards for Excellence 2013: Banker of the year

When UK chancellor of the exchequer George Osborne stood up in June in front of the City of London’s finest and announced that now was the time to begin to put Lloyds Banking Group back firmly in the hands of the private sector, no one was surprised.

Rumours of the sale of some or all of the UK government’s 39% stake in Lloyds, which it had been forced to take at the height of the financial crisis, were widespread. Investors and competitors accepted that Lloyds was well on the way to recovery. With the share price hovering around 62p, the government looked as if it might even be able to turn a profit on what was once such a distressed investment.

Wind the clock back 18 months to the start of 2012 and such an outcome would have been unthinkable. Lloyds was in the depths, whichever way you looked at it. Its share price was in a trough, at just 25p. The group remained saddled with nonperforming assets, many of them inherited from the ill-advised takeover of HBOS rushed through by former chairman Victor Blank in September 2008.

Losses for 2011 were £3.5 billion ($5.35 billion); during that year, Lloyds had provisioned more than £3 billion against future claims for the mis-selling of payment protection insurance (PPI), the first big UK bank to do so.

Perhaps most worrying of all, the bank’s chief executive was about to restart work, having been forced by his doctors to take almost two months out of the business because he was suffering from exhaustion. António Horta-Osório had only become CEO in March 2011. That the job he took on had taken such a toll on his health was taken by many as proof that the task of turning Lloyds Banking Group around was not just beyond him, but perhaps beyond any chief executive.

By the end of June 2013, Lloyds was one of the top-two-performing bank stocks in the world over the previous 18 months. It was the single-strongest performer on the FTSE100 in 2012, posting an 85% increase in share price. In the first quarter of 2013, Lloyds posted a statutory profit of more than £2 billion. Core tier 1 capital was more than 12%, the highest of any big UK bank. Costs, thanks largely to a reduction in group headcount of close to 30,000, were down by 7%.

Moreover, Lloyds was firmly back in business in its UK heartland: it was providing one in four mortgages to first-time buyers; it had increased net lending to SMEs by 4%, against a market reduction of 4%; and it had relaunched Halifax, still seen by many UK customers as a leading building society despite its multiple ownership changes over the previous decade.

A lot of Lloyds’ turnaround stems from the early decisions that Horta-Osório took. These were not easy. One of the first was to begin to pay down more than £100 billion in short-term loans from the Bank of England’s special liquidity facility. This had a direct impact on Lloyds’ income, estimated to be £2 billion. But Horta-Osório was adamant that Lloyds had to stand on its own feet as soon as possible. Another was the PPI decision. Horta-Osório says that despite the costs, it was "the right thing to do. It was the wrong product for clients." Lloyds took an additional £1 billion provision in 2013, taking total provisions to over £6 billion.

And the third was to accelerate the disposal of non-core assets. The previous management had not been willing to take losses on them. Horta-Osório believed it was the right thing to do again, especially if the sales were capital accretive. In 2012, £42 billion of non-core assets were sold, releasing £1.2 billion of capital.

The disposal programme has accelerated in 2013. Lloyds has sold its retail banking operations in Spain to Banco Sabadell; sold its 50% stake in Sainsbury’s Bank to the UK retailer; offloaded its international private banking operations to Geneva-based UBP; sold a portfolio of US RMBS for a cash consideration of £3.3 billion, generating capital of £1.4 billion; and sold down its stake in UK wealth manager St James’s Place in two tranches, increasing the group’s common equity on a fully loaded CRD IV basis by approximately £500 million.

Lloyds’ non-core assets should soon reach the £70 billion target that Horta-Osório says will make them no longer meaningful to the overall business.

In the meantime, Horta-Osório would no doubt still like to find a buyer for the 630 Project Verde branches that will now be run as a standalone business, after the Co-operative Bank backed out as a bidder.

More important, he can now focus on taking the strengths of the Lloyds Banking Group and generating the value to shareholders those should provide. It’s not by mistake that Horta-Osório points out that the Lloyds balance sheet is equivalent in size to that of Wells Fargo, Euromoney’s bank of the year. Lloyds’ market cap is around £40 billion; Wells Fargo’s is around four times bigger, at $220 billion.