Lloyds: a Deviant Case, Rejecting Universal Banking

Abstract

An analysis of institutions that do not fit existing paradigms often reveals more significant insights about the industries of which they are a part than does a similar analysis of those that fit the mould. Lloyds is such a case in the recent history of its industry, and an analysis of its leadership and strategic choices since the early 1970s can tell us a lot about the recent evolution of British banking and about what configurations of strategy and organization are likely to distinguish the high from the low performers in the future.

When the UK banks were in a risk-free environment, they had a volume culture. And they applied the same mentality to investment banking. Pitman [the Lloyds CEO] was an exception to this culture. He pursued a different strategy and a blindingly obvious one. Instead of volume and size, he looked at return on capital and shareholder value and got out of the losing businesses. He closed down his small investment bank and many international businesses. Instead, he chose personal banking, where the higher profits were, and now he has added to that many other retail businesses through a series of mergers. All this was blindingly obvious, but none of the others did it. It merely involves concentrating on what you do well.

Banking journalist

Pitman talked about ROE and his formula was simple: if it makes money, we’ll do it, and if not, we won’t. This was an extraordinary concept for British banking at that time. It was out of line with how our banks were managed.

Bank analyst

Lloyds’ numbers are indeed impressive. Pitman is the master of the simplified agenda, but I am not sure that it has a true strategic view. He did get rid of some nasty eggs in the portfolio and he is a master of managing it all. And he doesn’t have the other baggage (investment banking) of the clearers. Beyond that, he has bought well. He is a test of the big baron theory. He is very charismatic in representing his agenda and carrying it home. But ego sometimes gets in the way of big barons on capital allocation decisions, and he may make some bad ones in the future. So the big baron stuff is a worrier.

Management consultant