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Sir Win FTW at Lloyd’s Banking Group

July 28, 2009

It’s good to hear that Win Bischoff has a list of priorities in his new role as chairman of Lloyds Banking Group <LLOY.L>. Reviewing the position of chief executive Eric Daniels is apparently not at the top of it.

So what should he be doing when he formally takes the chair on Sept. 15?
 
The first thing is to accelerate the integration of HBOS into Lloyds. The group needs to stop dribbling out restructuring announcements (a few job losses here, a few there) and come clean about what it needs to do to secure the synergies that were promised from this ill-starred transaction.

True, promising to cut tens of thousands of jobs in the middle of a recession would be politically unpopular. But it would allow Bischoff to argue that Lloyds is doing what needs to be done in the interests of taxpayers, who own a large chunk of the bank. More importantly, it’s the single most direct thing he can do to drive up the share price.

Second, he needs to shepherd Lloyds through the European state aid process more or less intact. If the Commission forces it to make significant disposals, Bischoff needs to ensure that the group has plenty of time in which to make them.

Third, he needs to nail down Lloyds’s participation in the UK government’s asset protection scheme. The details still aren’t known even though it was announced months ago. Finalising the APS would allow Lloyds to segregate all the nasty HBOS corporate loans and other junk into a bad bank and run it off. Shareholders will know the basis on which they have been backstopped.

Eric Daniels may not be top of Bischoff’s list, but he should at least be fourth. Daniels has lost the confidence of shareholders. It isn’t just a question of the disastrous HBOS merger which occurred on his watch; Daniels has since become an invisible man surfacing only occasionally to make eccentric remarks, such as his observation to a parliamentary committee that his salary of more than 1 million pounds was “relatively modest”. Bischoff should start looking for a replacement.

Next, he should find a new owner for Scottish Widows, the insurance group Lloyds bought for a staggering 7 billion pounds in 1999. The group has retained Widows because it is allowed under current regulations to double-count the insurer’s embedded value towards its own capital. That will run out in 2012, leaving Lloyds with another hole in its balance sheet. If it’s to find a buyer at an acceptable price it needs to start looking well before that drop dead date.

And lastly, Bischoff needs to find ways to shrink Lloyds’ hefty market shares in areas like mortgages and current accounts to try and keep the competition authorities at bay.

The sooner Bischoff ticks these priorities off, the sooner it should be possible for UK Financial Investments — the state body that holds 43 percent of its shares — to start selling down its stake. If he can manage that process satisfactorily for the group’s shareholders, he will have earned his 700,000 pound annual salary.

Bischoff has so far had a somewhat chequered credit crunch. It does not help that he had a prominent role at Citigroup <C.N>, one of the biggest American road crashes, where he ended up as chairman. To be fair, he can’t really be held for all the disasters that unfolded there. But now he has a chance to secure his reputation. That would be a Win win for Lloyds’ battered shareholders.

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