A couple of issues for Lloyds

Anthony Hilton
28 Oct 2009

Though Lloyds' massive capital raising now seems inevitable there still seem to be two bits of unfinished business.

The first surely is the fate of the bank's chief executive Eric Daniels. There is a strong current of thinking in the City that Lloyds' decision to buy HBOS this time last year was far worse than the Royal Bank of Scotland's decision to go after Dutch Bank ABN Amro. Both were utterly disastrous choices for the bidding banks' shareholders but at least Sir Fred Goodwin could claim that the skies were still relatively clear when he launched his bid — albeit a lot more cloudy by the time the deal was completed. Daniels can have no such excuse. Lehman had collapsed by the time the HBOS deal was done and no one was in any doubt then that they were in dangerous times.

There is also some popular folklore that Lloyds' then-chairman Sir Victor Blank was the force behind the deal and he has already paid the price by resigning prematurely from the post. Now, Blank is certainly a deal-maker but Daniels can't be let off that lightly. In the calm days before the crunch he would often talk of his frustration at not being allowed by the monopolies authorities to make any more acquisitions in the UK. His view was that this meant he could never have the scale to be as efficient as the best of the American banks, and this in turn left Lloyds vulnerable to takeover by one of them. These concerns were reasonable given his position but it follows that one can quite imagine he did not need much persuading when Blank came in with a promise from the Prime Minister that Lloyds could have a clear run at HBOS and no prospect of a block from the UK authorities. Daniels was surely a willing partner rather than a reluctant debutante.

The deal when done not only destroyed the bank but pulled the rug out from under its most loyal shareholders who held Lloyds' shares precisely because it was not exposed to any of the nonsense. Never in the long history of ill-considered deals has one gone so wrong so disastrously so rapidly. That being the case, the institutions demanding Mr Daniels's departure as the price for supporting this massive fundraising surely have a point.

There is one further matter which one hopes will have the institutions digging in. Given that this fundraising centres around a further issue of equity then the principle of pre-emption ought to apply — namely that the new shares must be offered first to the existing shareholders. Only if they do not want them can they be offered elsewhere.

Clearly this is a difficult issue, what with the state of the bank, the amount of money being raised, a totally disillusioned shareholder base and the Government sitting there as a 43% shareholder. That, though, is all the more reason to insist on pre-emption because it is one of the few levers shareholders have to call management to account — and if ever a management needed calling to account it is this one. Pre-emption remains a guiding principle of the UK market. It has been ruthlessly ignored in the current troubles by many organisations one would have thought would know better. With apologies to Noel Edmonds for stealing his line, the shareholders need to tell the banker that if there is no pre-emption then there is no deal.

It's a bad time to be well-behaved

This column has commented frequently about the reluctance of banks to pull the plug on defaulting borrowers. Rather than be forced to acknowledge the loss of a loan, they will add unpaid interest to the capital sum outstanding, extend the term of the loan, give an interest rate holiday and if all else fails will participate in a debt-for-equity swap. It is a far cry from previous recessions and there has never been a better time to be an irresponsible borrower.

But the converse is that there has never been a worse time to be well-behaved. Perhaps because they are losing so much money with their bad customers or because they have been told to put profitability first, the banks are systematically making life much more expensive for good customers. Customers who have never given any trouble and have been scrupulous about not exceeding limits and meeting repayment deadlines are finding that virtue brings no reward. When they come up for annual renewal these customers find that the terms of their facilities have gone through the roof with substantial increases in the rate of interest charged on facilities and a massive increase in the arrangement fee.

High Street banks of yesteryear would never have penalised the good to indulge the bad. It shows how deeply they have been corrupted by the culture of the investment banks that even on the commercial side bonuses are now driven by the fees attached to their most basic services and how, as a consequence, they now hold customer relationships in low regard.