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Lloyds TSB Group (A):

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Business Portfolio Restructuring

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& Development

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04/2013-5713
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This case was written by Mark Hunter, Adjunct Professor, Laurence Capron, Professor of Strategy and Programme
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Director of “M&As and Corporate Strategy” at INSEAD, and Fares Boulos, Affiliated Professor of Practice in Strategy
ga

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at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or
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ineffective handling of an administrative situation.

Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at
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cases.insead.edu.
ya

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Copyright © 2012 INSEAD

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COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED
IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.
An

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This document is authorized for use only in Professor Himanshu Tambe's Corporate Strategy and Organization Design__ [PGP] at Indian School of Business (ISB) from Jan 2025 to Apr 2025.

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What Next for Lloyds?

25
ya

20

du
When Sir Brian Pitman stepped down as Chairman of Lloyds TSB on 19 April 2001, it was

.ed
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clear that one era had come to an end and another must begin.

ala

b.e
An

isb
Since 1983, when Pitman became chief executive of what was then Lloyds Bank, its share

ng

t]is
price had gone up by more than 40 times; put another way, the bank’s share price – Pitman’s

la/

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chief self-imposed performance metric – had grown by 26% per year on average throughout

5[a
ga

[
his tenure. More than any other UK financial institution, Lloyds had profited – but not in the

25
a_
an

02
ways anyone expected – from the “Big Bang” of 1986, when then-Prime Minister Margaret

0
ny
Thatcher had deregulated the banking sector. In the process, Lloyds had become a very

aV

la2

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different firm in scope as well as scale. While generally shunning overseas acquisitions,

a
Lloyds had acquired leading UK firms in sectors ranging from savings banks and life

An

ga

ga
ny
insurance to mortgage lending and personal pensions. In all of these moves, operational

la/

an

an
na
synergies had been coupled with rigorous cost-cutting (which earned Sir Brian the nickname
“Pitman the Hitman”). The result was a diversified but tightly-knit and highly focused
ga

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financial powerhouse that offered customers savings, investment products and borrowing
an

ya

ya
facilities through numerous interlinked channels.
du

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an

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How would Pitman’s successors – Chairman Maarten van den Bergh and CEO Peter Ellwood
b.e

/An

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– meet this challenge and continue his legacy of growth in shareholder value? What strategies
ny

would be required to match Pitman’s exceptional record? In the spring of 2001, the financial
t]is

la/
na

ala
world in the UK and abroad, as well as the firm’s new leaders, were studying Lloyds’ past in
5[a

search of clues to its future.

ga
/A

ng

an
02

a
du

The Insider from Another World

aV

aV
la2

b.e

Few contemporary managers know their firms as well as Brian Pitman knew Lloyds. Hired in
ny

ny
ga

t]is

1952, in response to a walk-in job posting, he served briefly as a junior manager in a local
na

na
an

branch office, and then was fast-tracked into assignments in Brussels, Paris and the US. Back
5[a

/A

/A

in the UK, he became an expert in property loans, and his performance during the UK’s
_V

property prices crash of 1973 – when he was asked to serve on a high-level government
02
ya

commission to unwind the mess – led to increasingly high-profile positions in corporate

u

du

services and the London head office. In 1979, he became deputy chief executive of the bank’s
la2

d
an

b.e

b.e

International division, which offered services from private banking to corporate investment. A
An

ga

reporter later noted: “He has made remarkably few enemies on his way up. People like his
t]is

t]is

relaxed and unpretentious style, and no one can remember ever seeing him lose his temper.”1
an

5[a

5[a
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With 9,000 employees and 500 offices worldwide, Lloyds International was considered a
glamorous place to work. In many key respects Pitman did not fit with that prestigious aura.
02

02
ya

Born during the Great Depression in 1931, he had lost his father in early childhood to an
la2

la2
an

accident, and went to school on a scholarship; he loved studying and was equally gifted at
team sports. But he nonetheless dropped out to begin contributing a wage to the family at 16.
An

ga

ga
an

an
_V

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1 Richard Thomson, “Profile of Brian Pitman, chief executive of Lloyds Bank”. Independent on Sunday, 29
ya

ya

July 1990.
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[at

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His gentlemen colleagues called him a “street fighter” and “bruiser”. Despite his multiple

25
gifts and excellent manners, he would remain their “charming thug”.2

ya

20

du
.ed
an
Before long, he had reason to see Lloyds International as a death trap. The Latin American

ala

b.e
debt crisis exploded in 1982, and Lloyds’ bad debts in the region amounted to several times

An

isb
the bank’s entire equity. (It was later said that Pitman’s energetic work for Lloyds had

ng

t]is
previously increased its exposure. If so, he and Lloyds were hardly alone – conventional

la/

at]
a
wisdom in banking circles was that international expansion was essential both for growth and

5[a
ga

[
to diversify risk). Pitman’s response to the crisis was counter-intuitive: as competitors rushed

25
a_
an

02
to pull assets out of Latin America, he persuaded his board to follow the lead of the US

0
ny
government and pour in capital to keep the debtor nations afloat. It would take nearly a

aV

la2

la2
decade for Lloyds to fully sort out its bad loans in the region, but the worst was past. Soon

a
after, he was named CEO of Lloyds. His chairman was Sir Jeremy Morse, a patrician figure in

An

ga

ga
ny
British banking. They would form a historic team.

la/

an

an
na

ga

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The Competitive Landscape

an

ya

ya
du

When Pitman took over as CEO, Lloyds was the smallest of the UK’s “Big Four” clearing
aV

an

an
banks,3 the others being Barclays, National Westminster (NatWest) and Midland Bank.
b.e

/An

An
Despite an upmarket image as a “thoroughbred” among banks, Lloyds shared several traits
ny

with the other three, traits that analysts considered largely responsible for a fall in profits of
t]is

la/
na

ala
one-fourth among the Big Four over the five years to 1983:
5[a

ga
/A

ng

• All showed rising operating costs, growing branch networks and headcounts. A key driver
an
02

of this trend was increasing demand for credit from small- and medium-sized enterprises
a
du

(SMEs), whose importance as customers was growing for the Big Four.
aV

aV
la2

b.e

• So-called “building societies”, which provided loans and savings accounts for new or
ny

ny
ga

aspiring homeowners, were offering higher interest rates than the banks for retail savings
t]is

na

na

accounts, and thus were taking away a source of cheap capital.

an

5[a

•
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The Big Four were still burdened with ongoing exposure to and losses from markets
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abroad, in the US as well as emerging markets. The Latin American crisis had nearly
02
ya

destroyed Midland.
u

du
la2

d
an

• Their capital ratios were falling, and were now equal or below the ratios of major US
b.e

b.e

banks. Commented the Financial Times, “The idea that British banks are somehow extra
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ga

strong [in terms of capital] has been shown to be something of a myth.”4

t]is

t]is
an

5[a

5[a
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02

02
ya

la2

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an
An

ga

ga

2 See James MacKintosh, “‘Charming thug’ bows out at Lloyds”. Financial Times, 18 April 2001.
an

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3 A “clearing bank” is one that can clear checks for its clients whether or not the check is drawn on an
account in the same bank. In practice, it is simply a full service retail bank.
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4 David Lascelles, “Financial Times Survey: UK Banking - Clearing Banks - Jockeying for City position and
ya

ya

Battling in High Street”. Financial Times, 24 September 1984.

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25
Defining the Standard for Performance

ya

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.ed
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Pitman described the initial struggle as a battle of principles:

ala

b.e
An

isb
ng
"My first goal as CEO was to get our board, and ultimately our management

t]is
la/
team, to come to some agreement on what constituted success for Lloyds. If we

at]
a

5[a
could agree on this, we could set a single, well-defined performance

ga

[
25
measurement, one that would replace our existing array of implicit objectives:

a_
an

02
serve shareholders, serve customers, serve employees, serve society in general.

0
ny
Such woolly goals get you nowhere because they aren’t specific enough to have

aV

la2

la2
an effect on people’s performance.”5

a
An

ga

ga
ny
Agreement on performance measures proved more elusive than Pitman had expected, beyond

la/

an

an
na
the notion that Lloyds hoped to be “the best financial services firm”. But where? In the UK, or
ga

_V

_V
the world? And what, asked Pitman, did ‘best’ mean? Biggest? Best-liked by satisfied
/A

customers? Pitman, his management team, the Chairman Sir Jeremy Morse, and finally the
an

ya

ya
full board tried and discarded numerous ideas. One was to use a ratio of market value to book
du

value, “which shows whether investors think assets are being used well or not”.6 At one point,
aV

an

an
b.e

returns compared to the rest of the Big Four were the favoured benchmark. Pitman later said
/An

An
ny

he let this protracted, messy process continue as long as was necessary to arrive at a measure
t]is

that could be driven through the company.

la/
na

ala
5[a

ga
/A

He recalled that after two key meetings with the board, return on equity (ROE) – the after-tax
ng

return on book equity or after-tax profits divided by book equity – was chosen as the
an
02

appropriate measure. Management then defined a target of ROE 10% over the rate of
du

aV

aV

inflation. But Maarten van den Bergh, already on the board, disagreed: the appropriate target
la2

b.e

was ROE in excess of the cost of equity, where cost of equity was defined as the minimum
ny

ny
ga

return that investors could expect to earn from owning a stock. This was accepted by the
t]is

board.
na

na
an

5[a

/A

/A
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However, the cost of equity had never been calculated at Lloyds and the first time the bank
embarked on an exercise to do so, the results were shocking: “We were horrified to discover
02
ya

that, whichever method of calculation we used, our cost of equity was somewhere between
u

du
la2

d
an

17% and 19%; whatever the exact figure, we knew that there was hardly a business in the
b.e

b.e

company that was generating an ROE anything near that,” Pitman reckoned.7
An

ga

t]is

t]is

In 1984, Pitman nonetheless made ROE in excess of cost of equity the standard for every one
an

of his operating divisions. Every form of expenditure, every resource allocation and
5[a

5[a
_V

investment had to pass the test: will it lead to an ROE in excess of the cost of equity?
Business units whose strategies promised high ROEs would get resources, others would not.
02

02
ya

Lloyds would also measure other parameters, such as customer satisfaction, but ROE-less-
la2

la2
an

cost-of-equity was the standard by which key decisions were made and that trumped all other
measures
An

ga

ga
an

an

5 Brian Pitman “Leading for Value”. Harvard Business Review, April 2003.
_V

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6 “The Bank That Wants To Be Just Like Coca-Cola”. The Independent, 21 September 1996.
ya

ya

7 Op. cit., “Leading for Value”.

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Pitman Spurns the Big Bang

25
ya

20

du
In the early 1980s, Prime Minister Margaret Thatcher had promised to liberalise financial

.ed
an
regulations and in 1984 her government began laying the ground for what became known as

ala

b.e
the “Big Bang” of 1986. A key feature of this programme to deregulate financial services

An

isb
would be to allow banks to become players on the Stock Exchange as brokers and “jobbers”

ng

t]is
la/
(a term that covers specialists in one class of securities). Barclays, which was considered the

at]
a

5[a
most innovative of the Big Four, took the lead in 1984 by investing £100 million in a

ga

[
partnership with two firms on the Exchange that would be transformed into a new subsidiary.

25
a_
an

02
NatWest and Midland followed suit.

0
ny
aV

la2

la2
As the Financial Times observed, “Lloyds, conspicuously, has done nothing at all.” In fact, as

a
Pitman later revealed, “We talked to some stockbrokers to see what was going on, but we

An

ga

ga
ny
never got into serious negotiations.” Instead, Lloyds set up an internal unit with fairly

la/

an

an
na
minimal resources to prepare brokerage activities. As media pressure built on Lloyds to do
more, Pitman argued that banks which paid high prices to acquire a foothold in the exchanges
ga

_V

_V
/A

at a moment when stockbrokers still held a monopoly in the trade and equities were booming,
an

ya

ya
might be “buying a business that will not be there any more after Big Bang”. In any case, his
du

staff predicted, the number of competitors on the exchanges could be multiplied by a factor of
aV

an

an
five. Reporter David Lascelles, a keen observer, argued that “The big question is whether
b.e

/An

An
these [partnerships or eventual subsidiaries] will actually work, given the novelty of securities
ny

trading for banks, and the vastly different cultures involved.”8

t]is

la/
na

ala
5[a

Perhaps not coincidentally, Pitman was an admirer of Jack Welch, who had become CEO of
ga
/A

ng

General Electric in 1981. Welch systematically took GE out of businesses where it could not
an
02

hold a first or second position. In justifying his refusal to invest heavily in brokerage
a
du

aV

aV

activities, Pitman made clear that he would like to follow a similar path at Lloyds:
la2

b.e

ny

ny

“Though we want to be a broadly based competitor, we believe we have got to

ga

t]is

make a choice. We must concentrate our efforts on those areas where we have
na

na
an

leadership or a special market position. If you clutter up the business with things
5[a

/A

/A

you are not good at, you lose the race for the things you are good at.”9
_V

02
ya

du

What Might Lloyds Be Good at?

la2

d
an

b.e

b.e
An

ga

Pitman soon disposed of stakes in the Royal Bank of Scotland and Grindlays Bank, and
t]is

t]is

invested in Lloyds’ existing franchises. Lloyds’ Black Horse Agencies, a network of estate
an

agents created just before Pitman became CEO, became the largest in the UK by December
5[a

5[a
_V

1985 through the acquisition of three other agencies. In the process, Black Horse gained
expertise and market share in home loans. Lloyds made no secret of its intention to further
02

02
ya

grow the business.

la2

la2
an
An

ga

ga
an

an

8 David Lascelles, “Financial Times Survey: UK Banking - Clearing Banks - Jockeying for City position and
Battling in High Street”. Financial Times, 24 September 1984.
_V

_V

9 David Lascelles, “Lloyds - Avoiding a 'macho man' image: Stock exchange liberalisation”. Financial
ya

ya

Times, 27 March 1985.

an

an

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t]is

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la
5[a

ga
/A

an
02
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ga

]isb

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an

[at

/A

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Lloyds also reached out to grab what Pitman called “apples dropping off trees. If they’re not

25
badly bruised, we can pick them up.”10 One of those apples was the Schroder Muenchmeyer

ya

20

du
Hengst (SMH) bank, which in late 1983 had been saved from going “criminally defunct” (in

.ed
an
the words of Fitch Ratings) through a US$190 million bailout from the German government.

ala

b.e
Lloyds took over SMH’s commercial and investment banking activities for an undisclosed

An

isb
price in 1984, claiming that it was thus “broadening the base of our operations in one of the

ng

t]is
world’s most important economies”.11 Midland and NatWest had already acquired German

la/

at]
a

5[a
banks. At this point, the Big Four’s grip on their home market was menaced by the arrival of

ga

[
heavyweight international competition, as Citibank of the US and Standard Charter of Hong

25
a_
an

02
Kong applied for entry to the UK clearing system. Lloyds’ acquisition was nonetheless

0
ny
considered “bizarre” in the City.12 It also acquired the troubled Continental Bank of Canada.

aV

la2

la2
a
The big move came in the spring of 1986, when Lloyds used its capital reserves and the cash

An

ga

ga
ny
from recent divestments to launch a hostile US$1.9 billion bid for Standard Chartered PLC, a

la/

an

an
na
British bank whose principal business was in former British colonies in the Middle East,
Africa and Asia (in particular Hong Kong). Pitman declared that Lloyds would gain “an
ga

_V

_V
/A

exceptionally strong competitive position in world markets… Our strengths in Britain, Europe
an

ya

ya
and Latin America will be bolstered by Standard Chartered’s presence in the United States,
du

the Far East and China.” The deal would enable Lloyds to bypass the refusal of regulatory
aV

an

an
authorities in numerous countries to allow new foreign entries into their banking systems. It
b.e

/An

An
would make Lloyds by far the biggest of the UK’s banks, with $91 billion in global assets. It
ny

might also, noted an observer, have left Lloyds “with an even more crippling bad debt
t]is

la/
na

ala
burden”.13
5[a

ga
/A

ng

Fortunately for Lloyds, or not, the bid failed, as Hong Kong investors seized the chance to
an
02

snap up 30% of Standard Chartered’s capital, and Federal Reserve regulators in the US
a
du

aV

aV

blocked Lloyds from acquiring a majority share on the grounds that both banks owned
la2

b.e

subsidiaries in California. Pitman later said the failure was his “biggest disappointment”,
because “we were right to believe that Asian markets would grow rapidly”.14
ny

ny
ga

t]is

na

na
an

The cruel irony was that Pitman was already completing the sale of Lloyds Bank California to
5[a

/A

/A

the Japanese bank Sanwa. Moreover, as Pitman admitted at the time, selling Lloyds Bank
_V

California had been a divisive and unpopular decision for him and his executive team.
02
ya

Certainly, it had failed to return its cost of equity since 1974, when Lloyds set it going. But it
u

du

was nonetheless a big foothold in a major, affluent market. Pitman recounted how, in tense
la2

d
an

b.e

b.e

executive meetings, “People would say that they are not there for the short-term, and what
An

ga

about the long-term in California? Can’t we make it a success in California?” In the end, he
t]is

t]is

said, “We accepted that we couldn’t compete. We were this small fish in this big pond and we
an

had nothing in it to offer.”15

5[a

5[a
_V

02

02
ya

la2

la2
an

10 David Lascelles, “Lloyds, Perversity or Perceptiveness? / Corporate strategy of the UK clearing bank.”
Financial Times, 3 November 1986.
An

ga

ga

11 John Tagliabue, “Lloyds to Acquire Schroder”. The New York Times, 13 December 1983.
12 Op. cit., “Lloyds, Perversity or Perceptiveness?”
an

an

13 Op. cit., “Profile of Brian Pitman, chief executive of Lloyds Bank”

14 Op. cit., “‘Charming thug’ bows out at Lloyds”
_V

_V

15 Elena Torrijos, “Interview: Sir Brian Pitman: Keep the chairman and CEO posts separate”. The Asian
ya

ya

Banker, 31 July 2004.

an

an

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/A

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02
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ga

]isb

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[at

/A

/A
_V
The Emergence of Value-based Management

25
ya

20

du
When Pitman reconsidered the sale of Lloyds Bank California nearly two decades later, he

.ed
an
saw it as “defining” moment for Lloyds: “It gave us the mettle we needed to put the interests

ala

b.e
of the shareholder first – for example, by shifting the focus from growth to profitability – and

An

isb
it set the stage for a resurgence in the bank’s fortunes.”16 It didn’t hurt that upon announcing

ng

t]is
la/
the sale of Lloyds Bank California, the stock price went up, confirming Pitman’s hunch that

at]
a

5[a
selling underperforming assets (and redeploying the freed capital in more promising areas)

ga

[
would create value.

25
a_
an

02
0
ny
Soon after, Pitman began visiting leaders of firms in the US, including Kellogg’s, Intel,

aV

la2

la2
Disney and GE. He believed that he could learn important lessons from each of these firms,

a
for example, how to be customer driven, something that Disney excelled at. The most

An

ga

ga
ny
important meeting for Pitman was with Roberto Goizueta, CEO and Chairman of the Coca-

la/

an

an
na
Cola Company. Goizueta was turning Coca-Cola into a far more aggressive and fast-growing
firm by setting an objective of doubling shareholder value every three years. Shareholder
ga

_V

_V
/A

value was defined as the increase in market capitalisation plus dividends. Pitman later
an

ya

ya
commented:
du

aV

an

an
“One of the great advantages of shareholder value as a governing objective is
b.e

/An

An
that it demands continual improvement. There is no time when you can sit back
ny

and admire your achievements. The measurement is obvious to all, inside and
t]is

la/
na

ala
outside the company. There is no hiding place.”
5[a

ga
/A

ng

However, despite economist Milton Friedman’s 1970 declaration that a firm’s managers were
an
02

responsible only to their shareholders, shareholder value was neither a well-established

a
du

aV

aV

management benchmark nor a widely used toolset. A consultant firm focusing on “value-
la2

based management” that Lloyds employed – Marakon – had been founded less than a decade
b.e

ny

ny

earlier. Like others on this path, Lloyds was largely inventing value-based management as the
ga

t]is

firm advanced.
na

na
an

5[a

/A

/A

Lloyds had already decided to use the benchmark of ROE less its cost of equity (18% on
_V

average at the time) as its main measure of performance. In other words, businesses that
02
ya

earned an ROE of less than 18% were candidates for either strategic and
u

du

financial restructuring or failing that for divestment.

la2

d
an

b.e

b.e
An

ga

One example of how these principles affected Lloyds’ strategic decisions was that between
t]is

t]is

1981 and 1990 Lloyds’ international assets would fall from 62% to 28% of the total. In the
an

process Lloyds estimated that it increased its interest margin to almost 25% higher than the
5[a

5[a
_V

rest of the Big Four. In the UK, Lloyds could fund consumer and SME loans through cheap
retail deposits; its international business was wholesale and corporate, and margins were
02

02
ya

lower.17 David Lascelles observed that Lloyds had merged its international and domestic
la2

la2

banks “in order to achieve cost savings and create a larger, unified balance sheet”. 18
an
An

ga

ga
an

an

16 Op. cit., “Leading for Value”.

17 Sylvia A. Handler, “The emphasis on value-based strategic management in UK companies”. Journal of
_V

_V

Strategic Change, V. 1 (1992), pp. 19-37.

ya

ya

18 Op. cit., “Lloyds, Perversity or Perceptiveness?”

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/A

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[at

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Pitman imposed the goal of doubling shareholder value every three years despite scepticism

25
and protest from most of his management team. (One exception was a senior executive who

ya

20

du
suggested that they think like predators that had taken over the bank and had to decide how to

.ed
an
change it.) Pitman believed that “Extremely stretching goals – some would say unreasonable

ala

b.e
ones – [are] the absolute key in these outstanding companies,” like Coca-Cola.19 He warned

An

isb
that Lloyds was about to become “less comfortable – and certainly less predictable… to work

ng

t]is
in”.20

la/

at]
a

5[a
ga

[
He explained to shareholders that, henceforth, “Each activity is viewed as a creator or

25
a_
an

02
destroyer of value. Businesses which consume cash and destroy value are targeted for

0
divestment.”21 Lloyds undertook a sell-off of marginally profitable assets and subsidiaries that

ny
aV

la2

la2
would generate £l billion in cash by 1990. Lloyds Merchant Bank, Pitman’s first answer to the

a
Big Bang, was an early casualty. In 1987, after accumulating £58 million in losses over two

An

ga

ga
ny
years it was sharply scaled back, and the executive running it resigned. New management

la/

an

an
na
refocused on corporate financing for SMEs, bypassing crowded competition for the business
of big firms and building on the £9 billion Lloyds had already lent to SMEs.22
ga

_V

_V
/A

an

ya

ya
Meanwhile, Lloyds also became the first of the 27 market-makers approved by the Bank of
du

England in the “Big Bang” to withdraw from the gilt-edged bond market. Pitman blamed
aV

an

an
“substantial running costs” and negligible profits. Rivals Barclays and NatWest, as Pitman
b.e

had predicted, meanwhile met with heavy losses.23 Lascelles noted: “Lloyds stands out as the
/An

An
ny

only British bank to have pulled back completely from the debt and equity markets in the
t]is

la/
na

UK.”24
ala
5[a

ga
/A

ng

Executive compensation was more and more linked directly to internal as well as external
an
02

performance. Bonuses to executive directors depended on meeting stretch targets for

a
du

efficiency ratios (expenses as a share of revenues) and ROE (see Appendix 3), as well as
aV

aV
la2

whether or not Lloyds’ total shareholder value ranked among the top 50 for firms listed on the
b.e

London Stock Exchange.25

ny

ny
ga

t]is

na

na
an

While business units were given more autonomy over their strategies, subject to
5[a

demonstrating acceptable ROE, an integrated group treasury gave headquarters more control
/A

/A
_V

over how capital was allocated in different units. Lascelles noted that treasurer Alan Moore
02
ya

had “forced other divisions of the bank to be more cost-conscious by reviewing the transfer
u

du

pricing arrangements through which he charges them for the funds he supplies”. Said Moore,
la2

d
an

b.e

b.e

alluding to resistance from fiefs within the bank, “I make no apology for this. People must be
An

aware of the marginal cost of money.” 26

ga

t]is

t]is
an

5[a

5[a
_V

19 Op. cit., “The Bank That Wants To Be Just Like Coca-Cola”

20 Brian Pitman, “In My Opinion – Sir Brian Pitman, chairman of Lloyds TSB and Institute of Management
02

02
ya

companion, believes ...” Management Today, 1 June 2000.

la2

la2
an

21 Cited by Handler, op. cit.

22 Op. cit., “Lloyds, Perversity or Perceptiveness?”
An

ga

ga

23 Caroline Merrell, “When the local bank went global: Big Bang gave high street clearers hopes of becoming
universal players”. The Times, 24 October 2006.
an

an

24 David Lascelles, “An Early Casualty Gets Back Into Combat: The Impact of Big Bang on Securities
Houses”. Financial Times, 14 November 1988.
_V

_V

25 See Lloyds TSB Group, Annual Report and Accounts 2000, pp. 42-43.
ya

ya

26 Op. cit., “Lloyds, Perversity or Perceptiveness?”

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“The Boldest Stroke”

25
ya

20

du
Lloyds also hoped to combine back-office operations and to further develop cross-selling for

.ed
an
different business units with similar activities. The “boldest stroke of all”, according to the

ala

b.e
Financial Times, came in 1988 when Pitman merged Lloyds’ life insurance and insurance

An

isb
broking, estate agency and unit trust activities with the Abbey Life Plc insurance firm to

ng

t]is
la/
create Lloyds Abbey Life. Rather than acquire Abbey Life outright, Pitman took a 57% stake

at]
a

5[a
worth £1.1 billion. The strategy was to use Lloyds’ branch network and retail customer base

ga

[
of six million account holders as a core market for “Abbey’s experienced direct sales force”,

25
a_
an

02
noted the FT. The Black Horse subsidiary, which also sold life insurance, likewise hoped to

0
ny
develop through the deal.27

aV

la2

la2
a
On the target side, Abbey Life needed Lloyds’ branch network to continue its growth path and

An

ga

ga
ny
protect itself from competition.28 The passage of the Financial Services Act of 1987 had made

la/

an

an
na
distribution a critical success factor for life insurance companies, and they feared losing
market share once banks could distribute financial products through their own proprietary
ga

_V

_V
/A

networks.29 Lloyds’ retail banking network powerfully extended Abbey Life’s 3,000-strong
an

ya

ya
direct sales force. Lloyds also gave product training to 45,000 banking staff in almost 2,000
du

branches in order to cross-sell insurance across its retail network. Furthermore, Lloyds Abbey
aV

an

an
Life introduced a direct sales force within Black Horse Financial Services (BHFS) to sell
b.e

/An

An
insurance to banking customers.30
ny
t]is

la/
na

ala
The effects were immediately visible. Selling into the Lloyds retail branch client base, Abbey
5[a

ga
Life’s sales force was able to sell three times more policies per week than its competitors.
/A

ng

Thus acquisition costs were far lower than the industry average.31 Within two years Lloyds
an
02

Abbey Life generated nearly £600 million in pre-tax profits, about half the group’s total.
a
du

aV

aV
la2

b.e

Cutting Costs without Losing Customers

ny

ny
ga

t]is

na

na
an

Though Lloyds was the most profitable of the Big Four, rising costs ate into returns. Outside
5[a

/A

/A

Abbey Life, by 1989 the group’s cost-to-income ratio (called the ‘Efficiency Ratio) had risen
_V

to 69.5%, according to analyst estimates, the third worst in the UK banking sector. A key
02
ya

driver of costs was easy to see: that year the bank employed 57,100 people, a historic peak.32
u

du

A scholar later commented that, from top to bottom, “The banking sector was notable for its
la2

d
an

b.e

b.e

paternalistic and stable employment and industrial relations environment.”33

An

ga

t]is

t]is

Lloyds now broke with that tradition. In a move that was at once symbolic and practical,
an

Lloyds closed its headquarters in the City and moved them to suburban Bristol, at a cost
5[a

5[a
_V

saving of 60% per square foot. Four thousand employees left the bank in 1989, and that was
02

02
ya

27 David Barchard, “Management (Under Pressure): Lloyds takes the bit between its teeth – The bank is
la2

la2
an

hoping to regain its thoroughbred image by cutting staff and selling assets”. Financial Times, 24 May 1991.
28 Salomon Brothers Inc., Lloyds Bank Plc, 11 October 1990.
An

ga

ga

29 Prudential Securities - Lloyds Bank/Abbey Life, 21 October 1988.

30 Salomon Brothers Inc., Lloyds Bank Plc, 11 October 1990.
an

an

31 Ibid.
32 Antonia Sinden, “The decline, flexibility and geographical restructuring of employment in British retail
_V

_V

banks”. The Geographical Journal, V. 162 No. 11, March 1996.

ya

ya

33 Ibid.
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only a start. By 1993, Lloyds’ staff had fallen to 44,277 – 22% less than in 1989.34 Accused of

25
heartlessness, Pitman responded: “Why should banking be any different from industry? The

ya

20

du
financial services industry [likewise] needs to be restructured, and the questions are when.

.ed
an
And how.”35

ala

b.e
An

isb
Others followed Lloyds’ lead. In 1991 alone, 29,000 employees left the industry. Some of the

ng

t]is
“savings” were illusory: Midland, the least profitable of the Big Four, thereby lost “hundreds

la/

at]
a
of bank managers in their fifties, products of the old system who provided the backbone of the

5[a
ga

V
bank’s managerial capacity”.36 Ironically, Pitman was like them – a manager who had worked

[
25
a_
an

02
his way up through the ranks.

0
ny
aV

la2

la2
In the wake of this shift, Pitman launched an internal campaign to increase retail customer

a
satisfaction. Lloyds TSB was keenly aware that it was cheaper to retain existing customers

An

ga

ga
ny
than to acquire new ones.37 He told The Times that Lloyds was making “huge” strides, thanks

la/

an

an
to “incentive payments on an individual basis for improving customer satisfaction levels”.38
na

Editor Michael Skapinker testified in the Financial Times: ga

_V

_V
/A

an
“While I was investigating tax-free savings accounts, a Lloyds branch manager

ya

ya
du

told me I would be better off, this once, going somewhere else. It made me much
aV

an

an
more likely to believe her when she said she had something good to offer. In the
b.e

1990s, Lloyds became even better.” 39

/An

An
ny
t]is

la/
na

ala
The Assault on Midland
5[a

ga
/A

ng

an
Hammered by the competition and weakened internally, Midland became a target for Pitman.
02

a
du

He proposed a merger, but Midland’s board declined, fearing that UK and European Union
aV

aV
la2

regulators would refuse the deal on antitrust grounds. In April 1992, Hong Kong-based HSBC
b.e

Holdings PLC, the largest investor in Midland with 14% of shares, made an offer of $5.81
ny

ny
ga

billion in shares and bonds for the rest of the firm. Midland’s board voted to recommend it to
t]is

na

na
an

shareholders, but before the deal was closed Lloyds offered $6.5 billion in cash, on condition
5[a

that UK regulators treat its offer on an “equal footing” with HSBC’s. (HSBC had very little
/A

/A
_V

presence in the UK and Europe, compared to Lloyds).

02
ya

du

The chairman of HSBC, William Purves, seized on Lloyds’ claim that the merger could
la2

d
an

produce savings of $1 billion annually: “[Lloyds’ offer] depends upon contraction and cost
b.e

b.e
An

cutting. [It] would mean the destruction of Midland. As the largest shareholder… we are
ga

appalled at this possibility.”40 Pitman’s statement that the merger would result in 1,000 branch
t]is

t]is
an

closures and 5,000 job cuts in each of the following four years – only 5% of the combined
5[a

5[a
_V

34 Ibid.
02

02
ya

35 Lindsay Vincent, “Mammon - From the Black Horse's mouth - Brian Pitman of Lloyds”. The Observer, 3
la2

la2
an

May 1992.
36 Nicholas Faith, “Broken chain of command – banks need new breed of managers”. Independent on Sunday,
An

ga

ga

2 February 1992.
37 Op. cit., Handler.
an

an

38 Robert Miller, “Knights Lead Charge on Deal of Decade”. The Times, 6 August 1994.
39 Michael Skapinker, “The chastened Lloyds TSB – my part in its downfall”. Financial Times, 1 October
_V

_V

2003.
ya

ya

40 Steven Prokesch, “Lloyds Bank Considering Midland Bid”. New York Times, 29 April 1992.
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staffs and mainly through “natural wastage”41 – prompted outraged headlines in the press. No

25
less than 160 Members of Parliament signed a motion denouncing Lloyds’ bid, feeding off

ya

20

du
and into fierce anti-bank sentiment among the public. Even before it failed, the bid severely

.ed
an
damaged Pitman’s public image. The Sunday Times sneered that he had previously succeeded

ala

b.e
only “by squeezing costs until the lemon was dry”, and called on him to “do the honourable

An

isb
thing” and resign.42

ng

t]is
la/

at]
a

5[a
ga

V
Acquiring the Competition

[
25
a_
an

02
0
Instead of resigning, Pitman confronted a key source of competition and a drain on profits: the

ny
aV

la2

la2
so-called building societies, which had lately begun paying interest on checking accounts. His

a
chairman, Sir Jeremy Morse, called this “an absolutely fundamental shake-up”, because

An

ga

ga
ny
building societies “have taken more than 50% cent of the [retail] deposits off the banks”.43

la/

an

an
na
Beginning with Lloyds, the Big Four responded by offering the same interest on checking
accounts. That ended what one observer called “the cross subsidies where, by forgoing
ga

_V

_V
/A

interest on the money in an account, customers paid the cost of running the account”.44 But
an

ya

ya
the competition remained: one analyst estimated that from 1975 to 1993 building societies
du

accounted for three-quarters of all new retail accounts in the UK. 45

aV

an

an
b.e

/An

An
In April 1994, Pitman proposed a £1.8 billion friendly merger with the Cheltenham &
ny

Gloucester building society, the sixth largest in the UK. “C&G” met all Pitman’s standards of
t]is

la/
na

ala
value: its pre-tax profits had grown by a 17% compound annual rate in the past five years (to
5[a

ga
£202 million), while its cash reserves had reached £864 million. The firm’s ratio of cost to
/A

ng

income was less than half Lloyds’, at 26% (Cheltenham & Gloucester was the lowest-cost
an
02

mortgage provider of the ten UK building societies46); like Lloyds, it sold businesses that
a
du

aV

aV

could not bring down costs, putting profits over market share. C&G held 370,000 mortgages,
la2

and they had more than doubled in value to £14 billion since 1989. Its management had
b.e

ny

ny

become skilled acquirers, absorbing 16 other building societies over a decade. They were also
ga

t]is

innovative – for example, they were the first in the sector to abandon so-called “endowment
na

na
an

mortgages”, which were highly profitable but hated by customers.47

5[a

/A

/A
_V

As with Abbey Life, Lloyds expected to create value from this acquisition by cross-selling
02
ya

mortgage products through its branch network (1,800 branches in 1994) and other distribution
u

du

strengths. Likewise, C&G believed that Lloyds’ distribution network would accelerate its
la2

d
an

b.e

b.e

growth. Both firms hoped to leverage C&G’s mortgage services across Lloyds’ existing
An

ga

mortgage products, which had not been very successful so far. All new mortgages would be
t]is

t]is

managed by C&G, the lowest-cost provider in the industry.

an

5[a

5[a
_V

41 Op. cit., “Mammon - From the Black Horse's mouth - Brian Pitman of Lloyds”
42 Ivan Fallon, “Viewpoint - Pitman must go with Morse – Lloyds’ chiefs should go following Midland bid
02

02
ya

mistake”. Sunday Times, 7 June 1992.

la2

la2
an

43 Op. cit., “The decline, flexibility and geographical restructuring of employment in British retail banks”
44 Patricia Tehan and Robert Miller, “Lloyds Finally Discovers a Soulmate – In Cheltenham”.
An

ga

ga

The Times, 22 April 1994.

45 Anon., “Lloyd's Bank's Latest Set-Back”. The Economist, 11 June 1994.
an

an

46 Credit Lyonnais Laing, Lloyds, 28 February 1995.

47 An endowment mortgage is one in which the customer pays interest directly, while the capital is paid
_V

_V

through subscription to an interest-paying endowment. Also see op. cit., “Lloyds Finally Discovers a
ya

ya

Soulmate - In Cheltenham.”
an

an

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The merger was closely examined by the UK anti-trust authority, the Competition

25
Commission. Other big banks had announced their interest in similar deals: “The commission

ya

20

du
will not easily stem that tide of money if banks are still determined to spend it,” commented

.ed
an
The Times of London.48 Moreover, public opinion supported the deal. Many building societies

ala

b.e
were badly run and others wanted to merge. In the end the deal was approved. Lloyds thus

An

isb
became a massive presence in every sector where retail customers might save and invest, from

ng

t]is
la/
life insurance to homes.

at]
a

5[a
ga

[
25
a_
The Deal of the Decade

an

02
0
ny
aV

la2

la2
On 11 October 1995, Pitman proved again that he was “full of surprises”, as The Economist

a
marvelled, with the announcement of Lloyds’ intention to merge with TSB, the UK’s eighth-

An

ga

ga
ny
largest bank, which had been privatised in 1986 and had struggled ever since. The new entity,

la/

an

an
na
to be named Lloyds TSB, would have 14 million clients – by far the UK’s largest retail
banking network. Of particular interest to Lloyds was TSB’s extensive client base in the north
ga

_V

_V
/A

of England, where Lloyds was weak. That enabled Lloyds to claim that the projected £350
an

ya

ya
million of operational savings from the merger would not come mainly from lay-offs or
du

branch closures. Instead, synergies across different business lines, from insurance to home
aV

an

an
loans as well as streamlined back-office costs would boost returns. TSB’s loss-making
b.e

/An

An
merchant banking arm, Hill Samuel, would be shut down.49
ny
t]is

la/
na

ala
At this point, Pitman’s prediction that the banking industry, like others, must restructure was
5[a

ga
being massively confirmed. In the US, mergers were steadily pressing the crowd of 10,000
/A

ng

banks into fewer and bigger units. The same trend was sweeping Europe; indeed, the UK
an
02

banks held a smaller share of total banking assets than their continental rivals in their
a
du

aV

aV

respective domestic markets.

la2

b.e

The currency of exchange in the TSB acquisition was Lloyds’ shares, each of which were
ny

ny
ga

exchanged for 2.704 Lloyds-TSB shares, giving Lloyds shareholders 70.6% of the group. The
t]is

na

na
an

only cash involved was a special dividend that TSB would pay its shareholders. In effect, said
5[a

one observer, “Lloyds is using TSB’s own money to entice its owners to cede control.”50 With
/A

/A
_V

£148 billion in assets, strong cash flow and still-rising share value, Lloyds TSB was poised
02
ya

for further acquisitions.

u

du
la2

d
an

b.e

b.e

Chairman Pitman
An

ga

t]is

t]is
an

In September 1996, Pitman became Chairman of Lloyds TSB, and was replaced as CEO of
5[a

5[a

the group by Peter Ellwood. Throughout Pitman’s tenure Lloyds’ stock price had doubled
_V

every 33 months or so, beating Pitman’s own ‘stretch’ target of doubling the share price every
02

02
ya

three years. How could Pitman and Ellwood maintain that success? And what strategy could
la2

la2

come close, let alone match, this record, unmatched by any of the other UK banks or indeed
an

by most companies? Building societies were tempting targets, hammered by competitive bank
An

ga

ga

mortgage pricing and a depressed market for homes, but the competition and anti-trust
an

an

48 Op. cit., “Lloyds Bank’s Latest Set-Back”

_V

_V

49 Op. cit., “ ‘Charming thug’ bows out at Lloyds”

ya

ya

50 Anon., “British Banks - A Merging Market” The Economist, 14 October 1995.

an

an

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/A

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02
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aV
la 2

.ed

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ga

]isb

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na
an

[at

/A

/A
_V
authorities in the UK were increasingly alert to any such effort by Lloyds TSB. The same

25
applied to any moves on other banks. Lloyds TSB was now too big to grow through

ya

20

du
acquisitions in the UK market. A new strategic vision was needed if profitable growth were to

.ed
an
be maintained.

ala

b.e
An

isb
Ellwood suggested that “The UK is clearly not the endgame of our strategy, and we have

ng

t]is
looked overseas.” But the prerequisite of any endgame, an observer commented, was that “Sir

la/

at]
a
Brian needs to keep the market happy. He can only take advantage of cracks in the

5[a
ga

V
competition if his own shares stay in shape.”51 Certainly, at 377 pence and close to 5x book

[
25
a_
an

02
value at the end of September 1996, Lloyds’ share price was valued at “a dramatic premium

0
ny
to any of its European competitors”, noted the Financial Times. However, it added, “Lloyds

aV

la2

la2
has been nervous both about the immediate dilution to its earnings that would result from an

a
acquisition in continental Europe and about its ability to work its magic elsewhere in

An

ga

ga
ny
Europe.”52

la/

an

an
na

Lloyds continued to move in the UK. Thanks to previous acquisitions, mortgages and life
ga

_V

_V
/A

insurance accounted for 37% of Lloyds TSB profits in 1998. At the beginning of 1998 the
an

ya

ya
share price had passed 800 pence for the first time, representing a hefty valuation of almost 7x
du

book value, pretty well unheard of for banks in the UK or elsewhere; by January 1999 it was
aV

an

an
over 900 pence; still a rich 6.5x multiple of book value.
b.e

/An

An
ny

Pitman and Ellwood now sought to extend their profit-driving franchises and cross-selling
t]is

la/
na

synergies by offering £7.3 billion for Scottish Widows, the UK’s sixth-largest life insurance
ala
and long-term investment firm. In contrast to previous acquisitions, Lloyds paid a premium of
5[a

ga
/A

ng

nearly 40% over Scottish Widows’ previous valuations. But Scottish Widows was widely
an
02

considered one of the best insurance brands in the UK, and a number of predators had been
a
du

hovering around it. Scottish Widows had been structured as a “mutual”, owned and funded by
aV

aV
la2

those who bought its products. However, said the FT, “The evolution of the life industry
b.e

towards low-margin, high-volume business appears to have prompted the 184-year-old life
ny

ny
ga

t]is

office to give up mutuality and team up with a group that could offer it much higher volumes
na

na
an

to pump through its insurance factory.”53

5[a

/A

/A
_V

Following the deal, the share price of Lloyds TSB briefly attained a historic peak of 1059
02
ya

pence. However, it fell to 744 at the end of 1999, about a 5x book value multiple.
u

du
la2

d
an

b.e

b.e

Driving Performance through the Branches

An

ga

t]is

t]is
an

At about the same time that Lloyds’ performance was starting to be growth-challenged,
5[a

5[a

customers like Michael Skapinker had begun to notice an unwanted change in their favourite
_V

bank:
02

02
ya

“I had made an appointment with Lloyds TSB to talk about savings accounts. The
la2

la2
an

person who sat me down in his office told me he could only discuss equity-linked
An

ga

ga
an

an

51 Michael Walters, “Brian the Bear hunts for a giant honeypot”. Daily Mail, 1 August 1988.
52 George Graham, “A good catch for Lloyds - Deal should revive shareholder returns”. Financial Times, 23
_V

_V

June 1999.
ya

ya

53 Op. cit., “A good catch for Lloyds - Deal should revive shareholder returns”
an

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t]is

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la
5[a

ga
/A

an
02
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products… When my wife made an appointment to discuss savings accounts at a

25
different Lloyds TSB branch and also ended up with someone who would only

ya

20

du
discuss equity-linked products… what I witnessed bore all the signs of staff being

.ed
an
pressed to meet sales targets regardless of the effect on customers’ interests.”54

ala

b.e
An

isb
Regulators were watching the same signs, which elsewhere in the UK had led to accusations

ng

t]is
of questionable practices in selling financial products. They now acted against Lloyds TSB.

la/

at]
a
First, the Investment Management Regulatory Organisation, a branch of the UK’s Financial

5[a
ga

[
Services Authority, hit the firm with a fine of £425,000 plus costs and compensation to

25
a_
an

02
customers that raised the total cost to nearly £1.5 million. The regulators charged that over

0
ny
five years Lloyds TSB had failed to administer retirement plans “with due care and

aV

la2

la2
diligence”, including overcharging, failing to pay interest and duplicating subscriptions. More

a
than 5,000 customers were involved.55 Then the IMRO fined Lloyds TSB another £100,000

An

ga

ga
ny
plus costs (that doubled the fine) for “failures in the completion of customer asset

la/

an

an
reconciliations and the organisation and control of its custody business” in 1997-98.56
na

ga

_V

_V
/A

The biggest sanctions hit Abbey Life for “a systemic failure” in its responsibility toward its
an

ya

ya
customers in 1995-99, despite warnings from internal and external auditors:
du

aV

an

an
“Abbey’s advisers made widespread unsuitable recommendations of mortgage
b.e

/An

An
endowments to retail consumers. A mortgage is, for most people, one of the most
ny

significant financial transactions of their lives. Mis-selling of mortgage endowments

t]is

la/
na

ala
can, therefore, have the most serious consequences. The size and nature of Abbey Life
(which had over 1,500 advisers) meant that these failures exposed a large number of
5[a

ga
/A

ng

consumers to potential loss.”

an
02

a
du

The penalties included a fine of £1 million and compensation to 48,000 customers that the
aV

aV
la2

FSA estimated might attain £143 million.57

b.e

ny

ny
ga

Prior to its acquisition by Lloyds TSB, Scottish Widows had avoided implication in scandals
t]is

na

na
an

that rocked the UK’s life insurance industry. But beginning in 2000 after Lloyds TSB
5[a

acquired it, its sales force was mobilised and closely monitored to sell an “Extra Income and
/A

/A
_V

Growth Plan” (EIGP). This was an equity-based “precipice” product, which offered high
02

interest but in which capital was at risk. It attracted £720 million in subscriptions. The FSA
ya

du

later reported that “Approximately 84% of the total number of sales [were] to customers who
la2

d
an

had no previous experience of equity-related investment products [and] resulted in such

b.e

b.e
An

customers having over 20% of their total financial assets invested in the EIGP.” When the
ga

t]is

t]is

stock markets crashed in 2001, investor capital losses were calculated by Lloyds TSB at
an

between 30% and 48%, depending on the individual.

5[a

5[a
_V

Lloyds TSB would be obliged to pay £98 million in compensation to customers and a record
02

02
ya

fine of £1.9 million.58 The group also provisioned £300 million to face further claims.
Concluded Michael Skapinker, the once-happy customer:
la2

la2
an
An

ga

ga

54 Op. cit., “The chastened Lloyds TSB - my part in its downfall”

55 Investment Management Regulatory Organisation, “IMRO fines Lloyds TSB £425,000”. Undated.
an

an

56 Investment Management Regulatory Organisation, “IMRO fines Lloyds TSB Bank PLC £100,000”.
Undated.
_V

_V

57 Financial Services Authority, “Final Notice To: Abbey Life Assurance Company Limited”. 2 December
ya

ya

2002.
an

an

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t]is

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la
5[a

ga
/A

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02
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[at

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“It is bewildering to see an organisation you respect behaving badly – a bit like

25
watching a bunch of football hooligans rampaging down the street and catching a

ya
glimpse of your old headmaster among them.” 59

20

du
.ed
an

ala

b.e
An

isb
What Must Lloyds Do?

ng

t]is
la/

at]
a
As Pitman stepped down as Chairman in April 2001, questions remained: How much more

5[a
ga

[
could the Lloyds TSB group grow at home while maintaining its stellar record of

25
a_
profitability? How much more could it grow profitably anywhere else?

an

02
0
ny
aV

la2

la2
With £230 billion in assets, it was the UK’s third-largest banking group. Moody’s Investors

a
Service expressed the consensus view: there was “no further scope for major expansion

An

ga

ga
ny
through acquisition in the UK”, and it would be difficult to grow overseas “while maintaining

la/

an

an
Lloyds TSB’s low risk profile”. However, unlike many European banking groups, there was
na

little reason to fear that Lloyds TSB could be swallowed by a predator. Its fundamentals were
ga

_V

_V
/A

sound and its shares were selling at a premium relative to that of its competitors. The group’s
an
leaders were under no immediate pressure to choose a new strategy.

ya

ya
du

aV

an

an
Had the benefits of Pitman’s strategy of focused diversification through first disposals and
b.e

later acquisitions, coupled with cost-cutting and sales synergies, been largely reaped? If so,
/An

An
ny

what might replace it?

t]is

la/
na

ala
5[a

ga
/A

ng

an
02

a
du

aV

aV
la2

b.e

ny

ny
ga

t]is

na

na
an

5[a

/A

/A
_V

02
ya

du
la2

d
an

b.e

b.e
An

ga

t]is

t]is
an

5[a

5[a
_V

02

02
ya

la2

la2
an
An

ga

ga
an

an
_V

_V

58 Financial Services Authority, “Final Notice To: Lloyds TSB Bank plc.” 24 September 2003.
ya

ya

59 Ibid.
an

an

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t]is

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5[a

ga
/A

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02
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_V
Appendix 1

25
Incentives for Executive Directors of Lloyds TSB Group, 2000

ya

20

du
(Source: Annual Report and Accounts, 2000)

.ed
an

ala

b.e
An
“… shareholders approved the introduction of a medium-term incentive plan which gives executive

isb
ng
directors (who do not include the chairman or the deputy chairmen) the opportunity of a [deferred]

t]is
la/
award…, subject to two performance targets, based on the efficiency ratio and return on equity. For

at]
a

5[a
the group chief executive the maximum award will be equal to 50 per cent of aggregate basic salary

ga

[
for the years 2000-2002 and for other executive directors, the maximum award will be equal to 25 per

25
a_
an

02
cent of aggregate basic salary for these three years.

0
ny
“The two minimum performance targets are a reduction in the group’s efficiency ratio to 37 per cent

aV

la2

la2
by the end of 200260 and a return on equity of 28 per cent by the end of 2002. No payment will be

a
An

ga

ga
made under the plan unless both these minimum targets are met…
ny
“The group is committed to the governing objective of maximising shareholder value over time. The

la/

an

an
na

board believes that executive share option schemes for senior executives provide an effective method
ga

_V

_V
/A

of giving them the incentive to achieve that objective…

an
“Performance conditions are set when the grant of options is made. To meet the performance

ya

ya
conditions under the current schemes the company’s ranking, based on total shareholder return
du

aV

an

an
(calculated by reference to both dividends and growth in share price) over the relevant period, should
b.e

be in the top fifty companies in the FTSE 100. There must also have been growth in earnings per share
/An

An
ny

that is at least equal to the aggregate percentage change in the retail price index, plus three percentage
t]is

la/
points for each complete year of the relevant period.”
na

ala
5[a

ga
/A

ng

an
02

a
du

aV

aV
la2

b.e

ny

ny
ga

t]is

na

na
an

5[a

/A

/A
_V

02
ya

du
la2

d
an

b.e

b.e
An

ga

t]is

t]is
an

5[a

5[a
_V

02

02
ya

la2

la2
an
An

ga

ga
an

an

60 Lloyds’ Efficiency Ratio, defined as Total Operating Expenses over Total Income, stood at 49.0% at the
end of 2001. In prior years it was: 46.4% (2000), 42.8% (1999), 48.8% (1998), 55.7% (1997) and 57.9%
_V

_V

(1996). By way of comparison, Barclay’s and NatWest’s Efficiency Ratios in 1998 were 60% and 68%
ya

ya

respectively.
an

an

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t]is

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la
5[a

ga
/A

an
02
AnaInyaI_VaIngaIla2I025I[atI]isIb.eIdu I / IAnaInyaI VaIngaIla/IAnaInyaI_Va

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la 2

.ed

ny

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ga

]isb

na

na
an

[at

/A

/A
_V
Appendix 2

25
Timeline of Major Events at Lloyds 1983-2001

ya

20

du
.ed
an
1983 Brian Pitman appointed CEO

ala

b.e
An

isb
1983 Buys distressed SMH bank of Germany

ng

t]is
la/

at]
a
1985 Sells stakes in Grindlays Bank and Royal Bank of Scotland

5[a
ga

[
25
a_
1986 Lloyds sells Californian unit to Japan’s Sanwa bank for US$286 million

an

02
0
ny
aV

la2

la2
1986 Acquires Continental Bank of Canada

a
An

ga

ga
1986 Entry into gilt-edged and Eurobond dealing
ny

la/

an

an
na
1986 Bids unsuccessfully for Standard Chartered PLC
ga

_V

_V
/A

1988 Merges five business units with Abbey Life Insurance Company
an

ya

ya
du

1990 Sells Canadian operations to Hong Kong Bank of Canada (subsidiary of HSBC)
aV

an

an
b.e

1992 Lloyds outbid for Midland plc by HSBC

/An

An
ny
t]is

1995 Acquisition of Cheltenham & Gloucester (C&G) for £1.8 billion

la/
na

ala
5[a

ga
/A

1995 Announces merger with TSB in £13 billion share deal.

ng

an
02

1996 Sells the corporate finance part of Hill Samuel, the merchant bank inherited from TSB
a
du

aV

aV
la2

1997 Lloyds sells Schroder Munchmeyer Hengst (SMH) to UBS for DM 350 million
b.e

ny

ny
ga

1997 Peter Ellwood appointed CEO, Sir Brian Pitman becomes Chairman
t]is

na

na
an

1999 Acquisition of Scottish Widows (fund management and life assurance) for £7 billion
5[a

/A

/A
_V

02
ya

du
la2

d
an

b.e

b.e
An

ga

t]is

t]is
an

5[a

5[a
_V

02

02
ya

la2

la2
an
An

ga

ga
an

an
_V

_V
ya

ya
an

an

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n
t]is

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la
5[a

ga
/A

an
02
AnaInyaI_VaIngaIla2I025I[atI]isIb.eIdu I / IAnaInyaI VaIngaIla/IAnaInyaI_Va

aV
la 2

.ed

ny

ny
ga

]isb

na

na
an

[at

/A

/A
_V
Appendix 3

25
20-year Evolution of PBT and Pre-tax ROE at Lloyds

ya

20

du
.ed
an

ala

b.e
3500 PBT (pre-exceptional) 60%

An
Pre-tax ROE (PBT/Av. Equity)

isb
ng

t]is
3000 50%

la/

at]
Pitman Era

5[a
2500

ga

[
40%

25
a_
an

02
PBT (£m)

2000

ROE
0
ny
30%

aV

la2

la2
1500

a
Recession 20%

An

ga

ga
1000 ny

la/

an

an
na
500 10%
ga

_V

_V
/A

0 0%
an

ya

ya
77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97
du
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19
aV

an

an
Source: 1983-1991 Annual Report, Datastream
b.e

/An

An
PBT: Profit Before Tax
ny

ROE: Return on Equity

t]is

la/
na

ala
5[a

ga
/A

Appendix 4
ng

an
Price-to-Book Ratio at Lloyds and Barclays
02

a
du

aV

aV
la2

b.e

Llyods Bank Barclays

ny

ny
ga

8.00
t]is

na

na
an

6.92
7.00
5[a

/A

/A
_V

6.31

6.00
02
ya

du

4.96
la2

d
an

5.00 4.65
b.e

b.e
An

4.11 4.05
ga

3.91
4.00
t]is

t]is
an

3.03
5[a

5[a

3.00 2.76
_V

2.48

1.99
02

02
ya

2.00 1.61
1.57
la2

la2
an

0.87 0.92
1.00 0.59 0.63 0.74
0.41 0.39 0.37 0.44
An

ga

ga

0.00
an

an

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
_V

_V
ya

ya
an

an

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t]is

na

la
5[a

ga
/A

an
02
AnaInyaI_VaIngaIla2I025I[atI]isIb.eIdu I / IAnaInyaI VaIngaIla/IAnaInyaI_Va

aV
la 2

.ed

ny

ny
ga

]isb

na

na
an

[at

/A

/A
_V
Appendix 5

25
Lloyds and UK Peers Share Price (*) Relative Performance (**) 1984-2001

ya

20

du
.ed
an

ala

b.e
An

isb
ng

t]is
la/

at]
a

5[a
ga

[
25
a_
an

02
0
ny
aV

la2

la2
a
An

ga

ga
ny

la/

an

an
na

ga

_V

_V
/A

an

ya

ya
du

aV

an

an
b.e

/An

An
ny
t]is

la/
na

ala
5[a

ga
/A

(*) Lloyds and Lloyds TSB share prices restated to the same base over the 1984-2001 period
ng

(**) 100 index base in 31/12/1983

an
02

a
du

aV

aV
la2

b.e

ny

ny
ga

t]is

na

na
an

5[a

/A

/A
_V

02
ya

du
la2

d
an

b.e

b.e
An

ga

t]is

t]is
an

5[a

5[a
_V

02

02
ya

la2

la2
an
An

ga

ga
an

an
_V

_V
ya

ya
an

an

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