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Lloyds Banking Group (UK)

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Lloyds Banking Group is the UK's biggest banking business by customer accounts, operating under multiple brands including Lloyds, Halifax and Bank of Scotland. It was created in 2009 by the government-brokered merger of what was then Lloyds TSB with failing rival HBOS. That followed a quiet few years for Lloyds TSB in which that once-mighty bank had been overtaken on the global stage by a succession of more aggressive domestic rivals. The opportunity to double in size through the acquisition of HBOS seemed heaven-sent at the time, but the process was to prove far more challenging than either the government or Lloyds TSB's management team had anticipated. The gathering pace of the global financial crisis was such that Lloyds TSB required government assistance to complete the takeover, and hurried due diligence failed to anticipate the true scale of HBOS's appalling financial problems, which continued to bleed red ink throughout the year following the merger. Despite a massive cash call to investors, Lloyds remained dependent on the support of the British Treasury, which had acquired 41% of its equity. Those shares finally began to be sold in 2015. In addition, in recompense for the state aid it had received, Lloyds was forced to spin off part of its retail estate into what is now the entirely separate TSB Bank.

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Competitors

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Brands & Activities

Lloyds Banking Group celebrated what it called a landmark year in 2017, claiming to have put almost all of what were once very considerable troubles behind it. That capped two decades of rollercoaster ups and downs.

Following a rough ride through the 2001 recession, Lloyds TSB had slipped from the #1 spot to bottom place among the UK's Top Five banking groups by 2007. Merger with HBOS - with its Halifax and Bank of Scotland brands - offered the prospect of re-establishing Lloyds as the country's biggest domestic retail bank. However, the HBOS deal also brought with it a collection of serious and mostly unforeseen problems, not least the sheer scale of that group's bad investments which continued to soar during 2009 as a result of the recession. To complete the deal, Lloyds was forced to seek the help of the Treasury, which pumped in emergency funding in exchange for 41% of its equity. When the true scale of HBOS's problems became clear, Lloyds' shareholders put immense pressure on the two executives who had engineered the deal, forcing both to step down.

New CEO Antonio Horta-Osorio set about beating the bank into shape at the beginning of 2011, but that process too was derailed by his emergency medical leave towards the end of the year as a result of exhaustion. His return to the company in early 2012 led to renewed stability later that year, and performance has steadily improved ever since. Following several share sales in the first half of 2015, the UK government's holding in Lloyds had reduced to under 15% by mid-year, and then to 7% by the end of 2016. As a result of a strong rebound in Lloyds' performance during the latter year, the final tranche of government-held shares was sold in May 2017.

UK Retail Banking

The group still operates under several different brands and businesses. The biggest and best known is UK Retail Banking, serving a total of around 25m customers. Core of this business is what is now Lloyds Bank, one of the country's biggest traditional banks with a network of around 1,150 branches nationwide in early 2018, as well as internet and telephone banking services. For 250 years, the symbol of Lloyds Bank has been a black horse, and this remains a regular and prominent image in its corporate marketing.

From 1999 until summer 2013, the business was known as Lloyds TSB. The Lloyds Bank name was readopted following the decision to split out TSB as a separate network. This followed a 2009 ruling by EU regulators that the group must reduce its dominance in the UK market as a penalty for being forced to accept a government bailout. The bank was ordered to divest around 630 retail outlets and selected other assets. An outline deal was agreed to sell the business to Co-operative Group at the end of 2011. However, completion of that deal suffered repeated delays as the Co-op struggled to secure financing for it, prompting Lloyds to consider an alternative plan, whereby the business could be spun off as an independent standalone bank under the TSB name.

The Co-op deal finally collapsed in April 2013, forcing Lloyds to adopt its alternative strategy, and the branches relaunched in Sept 2013 under the refreshed TSB brand. Around 4.6m customers transferred to the new brand as part of the process. An IPO of TSB went ahead in June 2014. Following a secondary offering in the Autumn, Lloyds' stake in TSB had reduced to 50% by October 2014, and the remaining shares were sold when TSB was acquired later that year by Banco Sabadell of Spain.

Previously the UK's biggest individual bank by retail market share, the spin-off of TSB pushed the Lloyds Bank brand into 2nd place at the end of 2014. By 1Q 2016 it had slipped into 4th place with around 12% share, according to the Gfk NOP/ JGFR barometer ranking, behind Barclays, Santander and even stablemate Halifax.

Sister brand Halifax is best known as a mortgage lender although it also offers a full range of banking services. It has a separate network of around 650 branches throughout the UK and around 10% share of the current accounts market, ranking #6 overall. The brand is positioned as the bank "which gives you extra". Since 2000 it has maintained a policy of featuring its own employees in its advertising. The best-known figure for many years was Howard Brown, previously a junior manager at one of Halifax's branches in Birmingham, who became the de facto "face" of the bank, appearing in virtually all of its ads, either live or in animated form, between 2000 and 2008. Although Brown was later dropped (and subsequently left the bank), it continues to use real employees in most of its advertising, although these have now been relegated from lead actors to the "Halifax choir" which sings the backing track for each ad.

Halifax is the UK's biggest mortgage lender, with market share of around 20%. However a move into higher-risk lending in the early 2000s led to a sharp rise in debts arrears. The number of mortgages in arrears rose sharply in 2005 for the second consecutive year, and the total value of impaired mortgages and other lending more or less doubled between 2003 and 2005, peaking at just over £6.5bn. As a result, the group tightened its lending criteria, with the result that its share of the UK gross mortgage lending market reduced from around 26% in 2003 to 20% by 2007. The additional disruption of 2008 caused the bank to cut back new loans substantially. Another specialist lender, The Mortgage Business, was closed to new business in 2008. In 2015, gross mortgage lending totalled £40.3bn, equivalent to 19.8% market share, six percentage points ahead of its closest rival.

Bank of Scotland, also acquired as part of HBOS, has a much less extensive branch network, with 200 branches now almost entirely concentrated in Scotland, where it serves as the group's main retail banking division. Outside its home market it is positioned as a business and corporate banking division. It had 2% share of the current accounts market at the end of 2014. During the 2000s it also developed a position as one of the largest providers of direct banking services in the UK. Its Card Services department issues a range of credit and charge cards to nearly 500 organisations ranging from charities to universities. The group also operates financial services joint ventures including Sainsbury's Bank for Sainsbury's, Centrica Financial Services (for Centrica), and NFU Mutual Finance for the National Farmers Union. The retail network also serves as the base for the Business Banking division, primarily managed under the Bank of Scotland brand. Intelligent Finance was a spin-off banking brand launched in 2000 to offer customers a range of banking services by phone and over the internet. As a result of the 2009 ruling by EU regulators, the group was obliged to close the business to new customers

Until the HBOS takeover, Cheltenham & Gloucester had served as Lloyds TSB's specialist mortgage provider. Those mortgages are actually now held directly by Lloyds, with C&G acting merely as the sales arm, rather than as a lender in its own right. Having adopted a highly conservative approach in recent years, the company is less exposed than some other mortgage lenders to high-risk customers. Birmingham Midshires is a separate specialist savings brand.

The group is also the UK's second-largest credit card issuer (behind Barclaycard), with around 15% share of the market by mid 2016. There are "affinity" relationships with Texaco, More Th>n and easyMoney to offer co-branded credit cards, and the bank launched a reward-based credit card in 2005 through the American Express network. In 2003 the group paid just over £1bn to acquire from Centrica the 50% stake it didn't already own in Goldfish, a credit card, loans and banking joint venture with around 1.1m card holders in the UK. However the business was sold on at the end of 2005 to Morgan Stanley. Black Horse offers consumer finance loans and leases in partnership with retailers, and the group also control the Lex Autolease fleet management business.

At the end of 2016, Lloyds agreed to acquire Bank of America's UK credit card business MBNA for £1.9bn. It will increase Lloyds' overall share of the UK credit card market by 11% to 26%, narrowly behind Barclaycard at around 28%.

Total income from retail banking in 2017 was £10.92bn, with underlying operating profit of £4.40bn. The group no longer breaks out performance by individual brand. The group is the UK's biggest mortgage lender with a total balance of £291bn at the end of the year, equivalent to around 22% market share. (The next biggest is Nationwide at over £100bn less). Total credit card lending was £18bn.

Insurance & Wealth

The group also controls several Insurance & Investment businesses. Prior to its rescue HBOS had set itself a goal of becoming the #1 in this market, moving aggressively into repayment protection on mortgages and motor insurance. It established three separate motor insurance brands, Esure, First Alternative and Sheila's Wheels, as a joint venture with Peter Wood, the financial services entrepreneur who had previously launched Direct Line in the 1980s. However, following the acquisition of HBOS by Lloyds, Wood raised funding to buy out the bank's 70% shareholding in the business for around £185m. Separately, Lloyds Insurance offers general insurance products, and claims to be the UK leader in the distribution of household and creditor insurance products, with more than 9m policies in-force. Lloyds also announced a move into utility services, forming joint venture Ideal with Scottish Power and Cable & Wireless. The service offers gas, electricity and telephone services via Lloyds high street branches.

This is partnered by the life and pensions business of Scottish Widows. Founded in 1815 as Scotland's first mutual life office, Widows was that country's 5th largest company when it was acquired by Lloyds TSB in 1999. It offers a wide range of life assurance, pensions and investment products through independent advisers, as well as in Lloyds offices, and through a partnership agreed in 2006 with Virgin Money. In 2013, Lloyds agreed to sell the asset management division of Scottish Widows to Aberdeen Asset Management for £500m in stock, giving it a 10% equity position in the combined group. Lloyds also owns former HBOS life assurer Clerical Medical. In 2017, the group agreed to acquire Zurich's UK workplace pensions and savings division.

Insurance & Wealth contributed income of £1.98bn, net of claims, and underlying profit of £939m.

Commercial Banking

The group has a significant presence in corporate and commercial banking, much of it inherited from HBOS. However, it is this division which created the biggest problems for HBOS, and these continue to plague the enlarged Lloyds Banking Group. During the mid 2000s, HBOS had enjoyed spectacular growth as a result of what was, in hindsight, extraordinarily reckless lending by its commercial banking unit. In 2007, it reported operating profits of £2.3bn on income of just £3.8bn, a spectacular performance. Inevitably, it was not to last. Even as the economy soured during 2008 and other banks stopped lending, the corporate banking arm of HBOS carried on until it was clear that a crisis was in progress. As a result, the division was subsequently forced to make substantial adjustments to its portfolio at the end of the year. Another significant victim of the market dislocation was the group's Treasury Services business, responsible for managing wholesale funding activities, liquidity and risk management, as well as the sale of treasury products to customers of the HBOS Group, and proprietary trading. Its performance was savaged by the freeze in the credit markets and collapse of global stock markets. A vast proportion of HBOS's investments were subsequently written off, and the business was absorbed into Lloyds TSB's Wholesale Banking division. This offers a range of corporate banking services to larger companies, including debt factoring and other services.

The remaining commercial banking business reported income of £4.85bn in 2017 and underlying operating profit of £2.49bn.

Divested Operations

Both Lloyds TSB and HBOS had disposed of most of their operations outside the UK by 2009. Lloyds TSB sold the majority of its international subsidiaries in 2003. Its private banking operations in France went to UBS, its Brazilian banking and consumer finance subsidiary to HSBC (for $815m), and National Bank of New Zealand, that country's second largest bank, to ANZ for A$4.9bn (US$3.5bn). The main international subsidiary of HBOS was BankWest, a regional retail and commercial bank based mainly in Western Australia. Bank of Scotland acquired a majority stake in 1995, and agreed to buy out minority shareholders in 2003. In 2008, struggling to raise capital, HBOS agreed to sell the business to the Commonwealth Bank of Australia for just A$2.1bn (around £1bn). It was obliged to report a large loss of £845m on that transaction. The group established a full-service presence bank in the Republic of Ireland for Halifax in 2006, mainly through the rebranding and expansion of what was previously Bank of Scotland (Ireland). However, this business has suffered substantial losses of its own as a result of Ireland's continuing financial woes, and was shut down during 2011. St James's Place, a wealth management business that was also previously part of HBOS, was sold in 2013.

Financials

For 2009, the first full year following the merger of Lloyds TSB and HBOS, statutory pretax profits jumped to over £1.0bn as a result of accounting adjustments, and total income more than doubled to £23.3bn. However, on a more realistic accounting of the two businesses, a huge increase in impairment charges to £24bn resulted in an underlying £6.3bn loss. For 2010, statutory results showed pretax profit of £281m on total income of almost £25.0bn. On a combined business basis, income slipped 2% to £23.4bn but the pretax result was firmly in the black at £2.2bn.

Yet a new blow came in 2011 as a result of a call by regulators for all UK banks to compensate their customers for missold payment protection insurance (or PPI). As the UK's biggest retail bank, Lloyds also had the biggest compensation to pay, and this resulted in a £3.25bn loss for the first half of the year. There was little improvement in the second half, with the result that final results for the year showed a pretax loss of £3.5bn. Revenues for 2011 slumped by 17% to £20.8bn. On a combined business basis, excluding the impact from its numerous inherited problems, the so-called "management profit" was £2.7bn on revenues of £21.1bn. Another huge charge against PPI compensation totalling £3.6bn dented performance for 2012 as well, resulting in a statutory loss of £570m, despite one-off gains from the sale of certain government securities. Revenues continued to fall, dipping almost 13% to £18.39bn. However significantly lower impairment costs caused underlying profits to more than quadruple.

There has been steady improvement in profitability since then, though income has declined significantly as a result of multiple disposals. Total income for 2014, net of insurance claims, slipped 11% to £16.40bn. Gross total income fell 21% to £29.89bn. Underlying profits jumped by 26% to £7.76bn. Another £2.2bn was set aside for PPI compensation, bring the total to-date to more than £12bn. Yet even after that and other extraordinary charges, statutory pretax profits more than quadrupled to £1.76bn, partly as a result of significantly lower impairment charges.

There was a dramatic surge in performance in 2016, primarily as a result of a sharp rise in revenues from trading. Total income soared by 71% to £39.61bn, of which almost half was generated by trading. That increase was wiped out by a matching rise in insurance claims. As a result, total income net of insurance claims was marginally lower than the year before at £17.27bn. However, lower provisions for PPI and litigation and trading profits caused statutory net profits to more than double to £2.51bn. Total assets were £818bn.

Lloyds celebrated what it called a "landmark year" in 2017 with net statutory profit up 41% to £3.55bn, despite setting aside another £1.65bn to settle complaints of PPI mis-selling. Total provisions for PPI now total £18.7bn. Total income rose 6% to £18.53bn. Total assets were £812bn. Net profits and income were both at their highest levels for more than five years.

Management

Lloyds suffered management turmoil for several years in the wake of the HBOS takeover. That deal ultimately cost group chief executive Eric Daniels and chairman Sir Victor Blank their jobs. Blank, regarded as the principal architect of the deal, stepped down in 2009 and was replaced by Sir Win Bischoff. Daniels oversaw integration of the business but eventually surrendered to shareholder pressure and retired in March 2011.

He was replaced as chief executive by Antonio Horta-Osorio, previously head of Santander UK. He initiated a complete shake-up of the management team, prompting the departure of several senior managers, including finance director Tim Tookey. Yet mid-way through his exhausting overhaul of the business, Horta-Osorio was forced to take emergency medical leave in November 2011 because of fatigue. For several weeks, there was widespread speculation that he would not be fit to return, creating an alarming vacuum at the top of one of the country's biggest banks. This prompted one of the senior executives due to join Lloyds from a rival to resign his post before starting. In fact, Horta-Osorio was pronounced fit to return at the beginning of January, and there was a further overhaul of the management structure to reduce the number of his direct reports. Lord Blackwell is non-executive chairman. There are two other executive directors: George Culmer (finance director) and Juan Colombas (COO).

Memmebrs of the executive committee include Vim Maru (group director, retail), David Oldfield (group director, commercial), Antonio Lorenzo (group director, insurance & wealth), Karin Cook (group services director), Stephen Shelley (chief risk officer) and Janet Pope (chief of staff & corporate services director).

Catherine Kehoe is managing director, group brands & marketing. Other members of the marketing team include Simon Watts (brand planning & operations director), Chris Strange (head of brand, customer & communications strategy), Alex Lane (head of brand identity), Kristy Halpin (head of consumer finance marketing), Jean Reddan (head of marketing communications, Lloyds & BOS) and Richard Carpenter (head of B2B marketing).

Background

Lloyds Bank was formed in 1765 in Birmingham as Taylors & Lloyds by partners John Taylor and Sampson Lloyd, and their respective sons, John and Samuel. While the fathers ran the Midlands business, their sons quickly established an office in the capital, acquiring shares in a separate banking concern in London which happened to based in premises traditionally marked for more than 100 years by the sign of a black horse. As one of literally hundreds of banks then springing up throughout the country, Taylors & Lloyds nonetheless prospered, managing the funds of local manufacturers and traders. As the country's infrastructure improved, Birmingham was well-placed to take advantage of trade between the City and the North of England, and gradually the Lloyd family took over control of the business, while also opening several regional offices. In 1853, the Taylor family sold their share of the institution, and Taylors & Lloyds became Lloyds & Company before incorporating in 1865 as Lloyds Banking Limited. In 1884, the business also acquired full control of the London office, and officially adopted the sign of the Black Horse as its corporate emblem.

Over the following years, Lloyds Bank expanded through a series of mergers, including the Wilts & Dorset Bank in 1914, the Capital & Counties Bank in 1918, and Henry S King East India Agents in 1923. By 1924, Lloyds Bank had made some fifty takeovers, and had more than 1m accounts and 2,000 offices, including several in Europe, Asia and Latin America. A strong connection with South America began in 1918 with the part-acquisition of the London & River Plate Bank. A later merger with the London & Brazilian Bank resulted in the creation of Bank of London & South America (BOLSA). In 1971, Lloyds Bank bought the controlling interest in BOLSA and merged it with Lloyds Bank Europe to form Lloyds & Bolsa International Bank. This name changed in 1974 to Lloyds Bank International (LBI). Also in 1971, Lloyds joined forces with the Midland and National Westminster banks to launch the Access MasterCard credit card as a competitor to Barclaycard Visa, introduced a few years earlier by Barclays Bank.

During the boom years of the 1980s, Lloyds diversified into other financial services including insurance, mortgages and real estate. Black Horse estate agents was formed in 1982, borrowing the bank's symbol of a charging black stallion, and had become the country's 4th biggest real estate chain within a decade. But the end-of-decade crash almost destroyed the group. All UK banks were damaged, but Lloyds had opened itself to huge exposure in the volatile Latin American markets. It wrote off over £2.6bn in bad loans, and was forced to sell off the majority of its international business and refocus on the UK market. Chief executive Brian Pitman (knighted in 1994) concentrated on the group's core market and gradually nursed Lloyds back to health, changing it from a staid traditional bank to one of the country's most dynamic financial institutions. It has remained primarily a UK bank ever since, with only a small international division.

In 1988, Lloyds acquired a majority stake in life insurer Abbey Life, setting a trend quickly followed by other banks. Lloyds paid for the stake by giving Abbey Life five of its peripheral businesses including Black Horse estate agents and financial services. (It acquired the rest of Abbey Life in 1996). A 1993 bid for Midland Bank was unsuccessful, but Lloyds successfully struck two benchmark deals two years later. In 1995, Lloyds was the first banking group to acquire a building society, paying £1.8bn for leading mortgage provider Cheltenham & Gloucester, originally founded in 1850. However the merger with TSB later that year transformed both Lloyds and the entire UK banking market.

TSB's roots were very different from those of Lloyds. While Lloyds was establishing its private banking services for merchants in the 19th century, a group of trustee banks were established independently around the country to manage savings for less well-off individuals. Unlike building societies, which were mutually owned by their investors and were specifically designed to pay for the building of housing, trustee banks were run by appointed directors, and allowed depositors to put something aside each week to guard against future hardship. By 1850, there were more than 600 of these trustee savings banks. Inevitably a process of consolidation began to occur, with the result that by 1950 the 600 had been whittled down to 100. With increased competition after Word War II, the trustee banks began to offer cheque accounts and loans, and reduced further to just four regional companies by 1985.

Deregulation of the high street banks brought even fiercer competition, and the four TSBs agreed to merge in 1986 and go public. The newly created TSB Group quickly acquired an insurance division, Target Group, as well as merchant banker Hill Samuel Asset Management. But like Lloyds, TSB stretched itself too widely. Hill Samuel cost TSB £777m in 1987, but just four years later, that business recorded a £420m loss after writing off a series of bad property loans. By mid-decade, TSB was struggling to hold its own between the big clearing banks and smaller niche lenders, and the merger with Lloyds appeared a perfect solution. TSB gained a much-needed strong partner, while Lloyds was able to add a substantial number of additional branches in areas like Scotland where it was weak. However, to begin with, the two brands operated as entirely separate businesses, with their own distinct retail outlets.

Over the following years, the enlarged group sold off a number of operations where services were duplicated. In 1997 the sale of four businesses - Business Technology Finance, International Factors, Endeavour Personal Finance and a controlling stake in German bank Schroder Munchmeyer Hengst - raised a pretax profit of more than £460m. However, the same year the group spent £300m on Losango, a Brazilian consumer finance company. The following year, the Black Horse estate agency business was sold to Bradford & Bingley building society, and Black Horse Financial Services merged with TSB Life to become Lloyds TSB Life Assurance. Also during 1998 and 1999, the group gradually amalgamated its two bank branch networks into a single business under the shared Lloyds TSB brand.

In 1999 Lloyds TSB added to its widening portfolio of non-retail financial services by snapping up Scottish Widows for £7bn. This much admired long-term savings and pensions specialist had originally been Scotland's first ever mutual life office, established in 1815 to safeguard the prospects of surviving female relatives of deceased schoolteachers, doctors or clergymen. This greatly strengthened Lloyds TSB's profile in the pensions market, but also created some duplication with the group's existing Abbey Life insurance offering. After several months looking unsuccessfully for a buyer, the Abbey Life insurance business was closed down. Zurich Financial Services' Allied Dunbar subsidiary agreed to take on 1,350-strong sales force, but declined the offer of the company's portfolio of £14bn of funds under management and 1.5m customers. These were later absorbed by Scottish Widows.

In late 2000, Lloyds TSB flexed its muscle once again when it intervened to derail Abbey National's attempts to merge with Bank of Scotland. BOS had already declined Abbey's first friendly overture when Lloyds weighed in with a more attractive offer for Abbey itself. This was rebuffed, but Lloyds persevered with a second, more formal offer to Abbey's shareholders, then worth around £18.6bn in cash and shares. In February 2001, the group reiterated its offer for Abbey National, increasing its offer to around £19.6bn. A few weeks later Abbey was forced to abandon its attempt to woo Bank of Scotland. For several months it looked likely that the Lloyds bid would succeed, but finally in July the government's monopoly regulators blocked the bid, effectively ruling out any further UK acquisitions for the group. Lloyds was reported to have opened merger discussions with at least one European bank a matter of days later, although no further developments materialised.

In 2005, Lloyds TSB introduced a current account compliant with Islamic laws, which forbid the payment and receipt of interest, and subsequently formed an alliance with ICICI Bank of India to offer a service targeting Indian families in Britain. The service offers free money transfers between the UK and India, as well as Rupee mortgage accounts, allowing customers to acquire property in India.

In September 2008, Lloyds TSB was asked by the UK government to launch a rescue bid for rival HBOS, then collapsing under the pressure from the global credit crisis originating in the residential and commercial property sector. Lloyds TSB agreed to acquire HBOS for an equivalent value of £12.2bn. As market conditions steadily worsened over the following weeks, there was speculation that the deal would collapse. Eventually, Lloyds TSB was forced to seek government funding to help it fund a revised takeover plan, in which the value of HBOS was scaled back to £8.6bn. The two companies also negotiated a combined total of around £17bn in additional capital from the government, which ended up with a shareholding of around 43% in the merged company, which was renamed Lloyds Banking Group.

The deal completed in January 2009, and the enlarged Lloyds Banking Group began the process of integrating the various HBOS brands. However the scale of HBOS's troubled assets obliged the group to seek further assistance from the government in March 2009. The state agreed to underwrite around £250bn of these bad loans in return for an enlarged shareholding which threatened to climb as high as 77%. To prevent such a situation, Lloyds raised around £13.5bn from shareholders in a cash call in late 2009

Last full revision 6th April 2018

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