Lloyds Banking Group

Lloyds Banking Group plc

File:Lloyds banking group.png
Company type	Public LSE: LLOY NYSE: LYG 41% Owned by United Kingdom Government
Industry	Banking
Founded	2009 (Lloyds Bank: 1677) (Bank of Scotland: 1695) (Trustee Savings Bank: 1810) (Halifax: 1853)
Headquarters	London, England, UK
Key people	Sir Win Bischoff (Chairman) Eric Daniels (CEO)
Products	Retail banking Commercial banking Private Banking General insurance Life insurance Pensions
Revenue	£17,569 million (2008)
Operating income	£3,819 million (2008)
Net income	£84 million (2008)
Total assets	£1,256 billion (2008)
Number of employees	146,000 (2006) (Cumulative figure for HBOS and Lloyds TSB subsidiaries from 2006).
Subsidiaries	Lloyds TSB Bank plc, Lloyds TSB Scotland plc, Bank of Scotland plc
Website	LloydsBankingGroup.com

Lloyds Banking Group plc is a British-based financial institution, formed through the acquisition of HBOS by Lloyds TSB in 2009. As at February 2010, HM Treasury held a 41% shareholding through UK Financial Investments Limited (see 'Government stake' below). The Group headquarters are located at 25 Gresham Street in London, with its registered office on The Mound, Edinburgh. Lloyds Banking Group's activities are organised into four business divisions: Retail Banking (incl. Mortgages), Wholesale, Insurance, and Wealth & International. Lloyds' extensive operations span the globe including the US, Europe, Middle East and Asia.

Lloyds TSB was formed in 1995 by the merger of Lloyds Bank and the Trustee Savings Bank. The company operated in England and Wales as Lloyds TSB Bank plc and in Scotland as Lloyds TSB Scotland plc. Its other subsidiaries included the mortgage bank Cheltenham and Gloucester, life assurance company Scottish Widows, finance house Black Horse and private equity investor Lloyds Development Capital.

Following the approval of both the Lloyds TSB and HBOS shareholders, the takeover was completed on 19 January 2009. The HBOS name ceased to be used publicly, although it will still exist as an employing entity. The Bank of Scotland brand will remain in Scotland while the Halifax and Lloyds TSB brands will be retained in England & Wales and will each offer different products and pricing.

The Group has announced it will sell Lloyds TSB branches in Scotland, the TSB brand, the Cheltenham & Gloucester branches and Intelligent Finance as a consequence of the UK Government taking a 43.4% share in the Group in January 2009.

History

Antecedents

Lloyds TSB was created in 1995, when the Lloyds Bank and the Trustee Savings Bank ("TSB") agreed to merge, creating at that time the second-largest bank in the UK by market capitalisation after HSBC Holdings; and the largest by market share. The first chairman of the merged bank was Sir Robin Ibbs.

Lloyds Bank was one of the oldest banks in the UK, tracing its establishment to Taylors and Lloyds founded in 1765 in Birmingham by John Taylor and Sampson Lloyd. Through a series of mergers, Lloyds emerged to become one of the Big Four banks in the UK.

The TSB can trace its roots back to the first savings bank founded by Henry Duncan in Ruthwell, Dumfriesshire in 1810. The TSB itself was created in 1985, by an Act of Parliament that merged together all the remaining savings banks in England & Wales under TSB Bank plc and in Scotland as TSB Scotland plc (excepting Airdrie Savings Bank which remains the only independent savings bank in the U.K.) .

Park Row Leeds branch of Lloyds TSB, with a sculpture of the black horse (called Cancara) in the foreground.

With a history dating to the 17th century, Bank of Scotland is the oldest surviving bank, after the Bank of England, in what is now the United Kingdom. In 2001, a wave of consolidation in the UK banking market led the former Halifax Building Society, which traces its roots to 1853, to agree a £10.8 billion merger with the Bank of Scotland; Halifax is now used as brand for its the Bank's branches in England, Wales and Northern Ireland and for savings and mortgages in Scotland.

Lloyds TSB merger

The creation of Lloyds TSB was the beginning of a large-scale 'consolidation' (or monopolisation) in the UK banking market. In 1995, the merger between TSB and Lloyds Bank formed Lloyds TSB Group plc, one of the largest forces in domestic banking.

In June 1999, TSB and Lloyds Bank branches in England and Wales were re-branded Lloyds TSB. Branches in Scotland came under the new brand of Lloyds TSB Scotland, which now had branches stretching from the Northern Isles to the Mull of Galloway.

In 2000, the group acquired Scottish Widows, a mutual life-assurance company based in Edinburgh in a deal worth £7 billion. This made the group the second-largest provider of life assurance and pensions in the UK after the Prudential. In September the same year, Lloyds TSB purchased Chartered Trust from the Standard Chartered Bank for £627m to form Lloyds TSB Asset Finance Division which provides motor, retail and personal finance in the United Kingdom under the trading name Black Horse.

Lloyds TSB continued to take part in the consolidation, making a takeover bid for the Abbey National in 2001, although this was later rejected by the Competition Commission.

In October 2003, Lloyds TSB Group agreed the sale of its subsidiary, NBNZ Holdings Limited comprising the Group's New Zealand banking and insurance operations to Australia and New Zealand Banking Group Limited.

In July 2004, Lloyds TSB Group announced the sale of its business in Argentina to Banco Patagonia Sudameris S.A. and its business in Colombia to Primer Banco del Istmo, S.A.

On 20 December 2005, Lloyds TSB announced that it had reached an agreement to sell, for cash, the credit-card business of Goldfish to Morgan Stanley Bank International Limited for a premium of £175m.

In 2007, Lloyds TSB announced that it has sold its Abbey Life insurance division to Deutsche Bank for £977m.

Lloyds TSB also became the first mainstream bank to launch a sharia-compliant business account, with the Islamic Business and Corporate account being the latest financial product to be run in line with sharia principles, which has also resulted in some controversy.

Acquisition of HBOS

Neighbouring Lloyds TSB and Halifax branches at Cross Gates, Leeds.

On 17 September 2008, the BBC reported that HBOS was in takeover talks with Lloyds TSB, in response to a precipitous drop in HBOS's share price. The takeover talks concluded successfully that evening, with a proposal to create a banking giant which would hold a third of the UK mortgage market.. An announcement was made at 0700 on 18 September 2008.

On 19 November 2008, the new acquisition (and government preference share purchase) was agreed by the Lloyds TSB shareholders. A similar vote of HBOS shareholders on 12 December 2008 resulted in overwhelming approval of the takeover.

Lloyds TSB Group changed its name to Lloyds Banking Group upon completion of the takeover of HBOS on 19 January 2009

On 12 February 2009 the CEO of Lloyds group, Eric Daniels, was questioned about the banking crisis during a session of the Treasury Select Committee of the House of Commons. One of the key issues concerned Lloyds' takeover of HBOS in 2008, and the amount of due diligence carried out before the acquisition. He said that a company would always like to do more due diligence on another company, but there are legal limits on how much is possible prior to an actual acquisition. Losses were a little higher than the £10 billion originally identified by the due dilligence owing to write-offs of property loans due to falling property prices and the lack of demand. The then-Chairman of Lloyds, Sir Victor Blank confirmed in an August 2009 interview with the BBC's Robert Peston that losses had been "at the worst end of expectations", but what had surprised the Lloyds board was the speed at which the losses happened, due to the unexpectedly sharp contraction of the world economy in the last quarter of 2008 and the early part of 2009. This position was confirmed by Archie Kane (senior Lloyds executive in Scotland) in evidence to the Scottish parliament’s economy committee in December 2009.

Government stake

October 2008 to January 2009

The Saint Helier branch of Lloyds TSB on Jersey, Channel Islands.

On 13 October 2008, PM Gordon Brown announced a government plan where the Treasury would invest £37 billion ($64 billion, €47 billion) of new capital into several major UK banks to avert a collapse of the financial sector. The banks included Royal Bank of Scotland Group plc, Lloyds TSB and HBOS Plc.

(Barclays only avoided taking a capital investment from the UK Government by raising capital privately, whilst HSBC moved capital to its UK business from other parts of its organisation around the world.)

It has been confirmed that Lloyds TSB would have been required by the FSA to take more additional capital from the government if it had not taken-over HBOS.

After the recapitalisations of HBOS and Lloyds TSB and Lloyds TSB's January 2009 acquisition of HBOS, the Government was holding a 43.4% stake in Lloyds Banking Group ordinary (voting) shares and £4bn of preference (non-voting) shares.

February to June 2009

Then in February 2009, after it became apparent that the recession would be deeper than originally anticipated, the FSA was instructed to stress test the banks against a severe economic downturn. The FSA has stated that the assumptions underlying the FSA Stress Test were not intended to be a forecast of what was likely to happen, but were designed to simulate a very severe (near catastrophic) economic scenario. These assumptions included:

• A peak-to-trough fall in UK GDP of over 6 per cent, with growth not returning until 2011 and only returning to trend-rate growth in 2012;
• A rise in UK unemployment to just over 12 per cent;
• A 50 per cent peak-to-trough fall in UK house prices;
• A 60 per cent peak-to-trough fall in UK commercial property prices.

The conclusion from this exercise was that Lloyds would need additional capital to enable it to absorb the future losses on loans that would arise if such a severe scenario ever came to pass. As the wholesale funding markets were at that stage effectively closed, Lloyds made a deal with the UK government in March 2009 consisting of two elements:

• Redemption of Preference Shares. The £4bn of preference (non-voting) shares held by UKFI were repaid on 8 June 2009 following the issue of new ordinary shares - this will avoid the payment of £480m annual interest to the Treasury and allow Lloyds to resume the payment of dividends when profits allow. These new ordinary shares were initially available to existing shareholders through an Open Offer at 38.43p that closed on 5 June 2009 - 87% were taken-up. The remaining 13% were all placed in the market on 8 June 2009 at 60p. This Open Offer and Placing was underwritten by the Treasury - if none of these new ordinary shares had been taken-up by existing shareholders or the open market, the government (as underwriters of the deal) would have bought them and their shareholding would have increased to a maximum of 65%. This did not happen, the government holding remained at 43.4% and Lloyds became the first European bank to repay government 'credit-crunch' investment. (Following the government's 43.4% participation in June's Open Offer, the average buying price of the government's total shareholding was 122.6p)

• Asset Protection Scheme. Lloyds agreed in principle to enter the government's Asset Protection Scheme to insure it against potential future losses on previous loans (primarily on the old HBOS portfolio). The fee for this would have been paid for by the issue to the government of new 'B' (non-voting) shares, which could have increased the government holding to a maximum of c.62% (or higher if the government had bought all the ordinary shares issued to redeem the preference shares).

Second Half of 2009

However, with Lloyds impairments having peaked in the first half of 2009, by the middle of 2009 the Asset Protection Scheme increasingly looked like a poor deal for Lloyds. Following negotiations, the government confirmed on 3 November 2009 that Lloyds would not enter the scheme (although RBS still would). Instead, Lloyds launched a rights issue to raise capital from existing shareholders - as an existing 43.4% shareholder, the government chose to take part in this and thus maintain its shareholding at 43.4%. Following this, the National Audit Office has calculated the government's average buying price for it entire stake in Lloyds as about 74p.

It was announced in the Government's Pre-Budget Report on 9 December 2009 that the forecast for the total loss to taxpayers for all the bank bail-outs (not just Lloyds) had been reduced from £50bn to just £10bn - in part because of the restructuring of the Government's Asset Protection Scheme.

The final part of the December 2009 capital raising involved the issuing of new shares to existing debt holders in February 2010. This diluted existing shareholders, including thr UK Government whose shareholding was reduced from 43.4% to c.41%

Capital raising and EU-mandated divestment

King Street Manchester branch of Lloyds TSB, designed by Charles Heathcote in 1915.

On 3 November 2009, a series of announcements were made.

Capital raising

Avoidance of Government Asset Protection Scheme (GAPS) through at least £21 billion additional core capital generation:

• £13.5 billion rights issue (HMT/UKFI has decided to fully subscribe in order to avoid current holding being diluted)
• over £7.5 billion exchange of existing debt notes into a 'contingent' form that will convert to equity if Lloyds' core tier 1 ratio drops below 5% (strong investor demand increased this to the maximum £9bn)

Tier 1 capital ratio thus increased to equivalent of 8.6% as at June 2009.

GAPS exit fee

Payment to HMT of £2.5bn GAPS 'exit fee' to cover the effective protection provided by the scheme since it was proposed earlier in the year.

Divestment (sell-off)

Creation and sell-off of a retail banking business with at least 600 branches, a 4.6% personal current account market share and approximately 19% of the Group’s mortgage book, to include:

• C&G savings accounts and all C&G branch-based mortgages, all C&G branches but not the C&G brand
• Lloyds TSB Scotland, including all branch-based customers, but not the Lloyds TSB brand
• c.250 Lloyds TSB branches in England and Wales, including customers based at those branches
• The TSB brand (usable across the UK)
• Intelligent Finance (the business and customers)

The EU Commission has required that the sell-off be completed within four years.

Share price history

Lloyds' Re-based Share Price	Lloyds' Original Share Price	Date	Events
275	550	03/07/07	Credit Crunch (reduced inter-bank lending) starts, driven by US sub-prime mortgage losses as US interests increase.
262	520	13/09/07	Northern Rock bank run.
196	395	15/02/08	One week before Northern Rock nationalisation.
217	457	22/02/08	Northern Rock nationalised.
196	397	17/03/08	Bear Stearns (US) takeover proposed.
137	278	11/07/08	IndyMac Bank (US) failed. Crude Oil peaked at $US147.
152	310	07/09/08	Fannie Mae and Freddie Mac rescued by US Government. Nationwide Building Society announced takeover of Derbyshire & Cheshire building societies.
134	273	15/09/08	Lehman Brothers (4th largest US investment bank) bankruptcy. Merrill Lynch's acquisition by Bank of America announced.
138	280	17/09/08	LTSB / HBOS take-over proposed.
124	251	26/09/08	Washington Mutual Bank (US) failed.
108	217	29/09/08	Bradford & Bingley rescued by UK government. Glitnir rescued by Iceland government. The United States Congress rejected proposed $700bn 'bail-out' plan.
144	290	03/10/08	US government £394m rescue plan for financial services industry.
112	225	07/10/08	Landsbanki (parent of Icesave) rescued by Iceland government.
94	189	10/10/08	Inter-bank lending largely frozen by risk concerns.
79	162	13/10/08	UK Government-proposed re-capitalisation of RBS, HBOS & LTSB announced. UK consumer price index (CPI) peaked at 5.2% due to high energy & food costs. Takeover of troubled US bank Wachovia by Wells Fargo is approved by regulators.
93	188	06/11/08	UK base rate cut by 1.5% to 3%.
80	162	04/12/08	UK base rate cut by 1% to 2%, although LIBOR remained high.
65	134	19/12/08	Global recession gaining pace. Ratings agency Standard and Poor's downgrades its investment rating of a number of so-called monoline insurers, which specialise in insuring bonds. They guarantee to repay the loans if the issuer goes bust. There is concern that insurers will not be able to pay out, forcing banks to announce another big round of losses.<bt /> (1 week earlier Sanderson State Bank (US) failed - 25th US bank to fail in 2008.)
51	103	15/01/08	Bank share price falls - Barclays 25% fall. Further US government support package announced. Further UK government support proposed to encourage more lending, but lack of details lead to greater market uncertainty.
32	65	19/01/09	LTSB / HBOS take-over & government re-capitalisation completes - government stake of 43.4%. Royal Bank of Scotland £28bn losses for 2008 announced. General principles of Government Asset Protection Scheme (GAPS) announced.
22	45	21/01/09	Intraday low of 24.59 (16.37p re-based).
50	101	28/01/09	Positive market analyst views (e.g. UBS & Citi).
30	61	13/02/09	Lloyds confirmation of £11bn loss at HBOS in 2008 (c.£1.6bn more than expected from due diligence).
22	43	09/03/09	Terms for proposed Lloyds participation in GAPS announced.
44	66	05/06/09	Lloyds £4bn Open Offer (to redeem government preference shares) completed with new shares issued at 38.43p - UK government participated as existing shareholder so stake remained at 43.4%.
62	93	05/08/09	Lloyds Interim Results. Eric Daniels (CEO) stated that losses on bad loans for the whole Group had peaked in the first half of 2009, due to heavy write-downs made on HBOS corporate property loans. (Losses on retail loans expected to increase in-line with unemployment , but those losses expected to be much less than the corporate property ones.)
74	111	28/08/09	Continuing media speculation about Lloyds rights issue and reduced GAPS participation.
73	109	23/09/09	Lloyds raises £4bn from wholesale markets without UK government guarantees through first European issue of Residential Mortgage Backed Securities (RMBS) in over a year.
62	93	16/10/09	Lloyds sells Halifax Estate Agents.
58	87	03/11/09	Confirmation of Rights Issue @37p, exit from Government Asset Protection Scheme, EU Competition-required sell-offs.
55	55	14/12/09	Rights Issue completed with 95.3% take-up. Rump placed @55.5p.
47	47	12/02/10	Confirmaation that new shares would be issued as final part of December 2009 capital raising - all existing shareholdings diluted. Government shareholding reduced from 43.4% to c.41%

Operations

The Edgbaston branch at Five Ways, Birmingham, designed by P. B. Chatwin in 1908.

The Group is organised as follows:

• UK Retail Banking - Helen Weir, Group Executive Director (formerly of LTSB)
  • Provides a full range of banking and financial services to some 30 million personal customers through over 3,000 branches across the UK, as well as telephone and internet banking services. Cheltenham & Gloucester sells its products through branches of C&G and Lloyds TSB as well as over the phone and internet and through mortgage intermediaries. Following the HBOS merger, the Group is the largest mortgage lender in the UK. Profit before tax from UK Retail Banking in 2006 was €1,802 (£1,549) million.
    • Lloyds TSB Bank - England and Wales
    • Lloyds TSB Scotland - Scotland
    • Bank of Scotland - Scotland
    • Halifax - England, Wales and Northern Ireland
    • Cheltenham and Gloucester- mortgage and savings bank
    • Birmingham Midshires - mortgage and savings brand
    • Intelligent Finance
    • Scottish Widows Bank - direct banking arm of Scottish Widows

• Wholesale Banking - G. Truett Tate, Group Executive Director (formerly of LTSB)
  • Provides banking and related services for major UK and multinational corporates and financial institutions, as well as small- and medium-sized UK businesses. It also provides asset finance and manages Lloyds TSB Group's activities in financial markets through its treasury function. Also provides banking and financial services in North America (US and Canada). Profit before tax from Wholesale and International Banking in 2006 was €1,908 (£1,640) million.
    • Lloyds TSB Corporate Markets
    • Lloyds TSB Commercial Finance
    • Bank Of Scotland Corporate
    • Lloyds TSB Commercial
    • Bank of Scotland Commercial
    • Blackhorse
    • Offshore Banking

Carfax Oxford branch of Lloyds TSB on High Street, designed by Stephen Salter in 1901.

• Insurance and Investments - Archie G. Kane, Group Executive Director (formerly of LTSB)
  • Scottish Widows is the Group's specialist provider of life assurance, pensions and investment products, distributed through the Lloyds TSB branch network, through independent financial advisers and directly via the telephone and the internet. Insurance and Investments also includes general insurance underwriting and broking (home, creditor, motor, travel, pet). Profit before tax from Insurance and Investments in 2006 was €1,110 (£950) million.
    • Scottish Widows
    • Clerical Medical - The Clerical Medical brand will be phased out with the sales team merging with that of Scottish Widows.
    • Lloyds TSB Insurance Services Limited
    • Halifax Insurance

• Wealth and International - Jo Dawson, Group Executive Director (formerly of HBOS)
  • UK Private Banking
  • International Private Banking
  • International Retail Banking - includes Channel Islands and Isle of Man)
  • International Banking - includes Bank of Scotland (Ireland) and HBOS Australia
  • Scottish Widows Investment Partnership (SWIP)

• Other Group Directors
  • Tim Tookey - Group Finance Director (formerly of LTSB)
  • Carol Sargeant - Chief Risk Officer (formerly of LTSB)
  • Angie Risley - Group Human Resources Director (formerly of LTSB)
  • Mark Fisher - Group Operations and Integration Director (externally recruited to Lloyds Banking Group from RBS)

Controversy

Links to the arms trade

In December 2008 the British anti-poverty charity War on Want released a report documenting the extent to which Lloyds and other UK commercial banks invest in, provide banking services for and make loans to arms companies. The charity writes in its report that Lloyds holds shares in the UK arms sector totally £717.5 million, and serves as principal banker for BAE Systems, the UK's largest arms company. The report also details Lloyds's dealings with known producers of cluster munitions and depleted uranium.

Cutting off aid to Gaza

Lloyds TSB stands accused of "cutting off aid to Gaza". In November 2008 the bank delivered a notification to the Islamic Bank of Britain (IBB) to cease all dealings with British charity Interpal - a British non-political and non-profit making charity set up to help Palestinians, and one of the few sources of humanitarian assistance in occupied Gaza. The notification was delivered without warning or prior consultation. The following day, the UN announced that it had run out of food supplies and essentials in the Gaza Strip.

Tax avoidance

In 2009, a case was brought against Lloyds by a department of the UK Treasury (HM Revenue & Customs) on grounds of tax avoidance. Lloyds are accused of pouring hundreds of millions of pounds into transatlantic tax avoidance schemes in the form of loans to American financial institutions.

HBOS bad loans

On Friday, 13 February 2009, Lloyds Banking Group revealed that the losses at HBOS were greater than had been anticipated at around £10billion. The share price of Lloyds Banking Group plunged 32% on the London Stock Exchange, carrying other bank shares with it. The acquisition was carried out rapidly in 2008, however due diligence undertaken by Lloyds indicated an anticipated £8.5bn HBOS loss. The Lloyds management cited a deterioration in the economy subsequent to the due diligence for the HBOS losses increasing from the anticipated £8.5bn to the actual £10bn.

Awards and recognition

In July 2007, Euromoney announced Lloyds TSB as the winners of its Awards for Excellence.

In June 2008, Lloyds TSB Group came top in the Race for Opportunity’s (RfO) annual survey.

In May 2009, Lloyds TSB Corporate Markets was recognised as ‘Bank of the Year’ for the fifth year running at Real FD/ CBI FDs' Excellence Awards.

In October 2009's "What Investment" magazine awards, Halifax won Best Savings Account Provider and Halifax Share Dealing was also named Best Share Dealing Service.

In October 2009's "Consumer Money Awards", Halifax won Best First Time Mortgage Provider. In addition, Lloyds' brands were commended in several other categories, including Cheltenham & Gloucester for Best Remortgage Provider and Best High Street Mortgage Provider; Lloyds TSB for Best Current Account Provider, Best Student Account Provider and Best Customer Service Provider; and Halifax for Best ISA Provider and Best High Street Savings Provider.

In November 2009's "Personal Finance Awards", Halifax was awarded Best Premium Current Account (for the Ultimate Reward Current Account) and Best Savings Account Provider. In the Best Mortgage Provider category, Halifax was highly commended. Halifax Sharedealing was named Best Online Stockbroker for the third year in a row, and was highly commended in the Excellence in Customer Service category. Halifax Investments was named Best Investment Product Provider. Lloyds TSB won Best Student Finance/Banking Provider and was also highly commended in the Best Current Account Provider awards. Scottish Widows was highly commended in the Best Pension Provider category.

In November 2009's "Your Mortgage Awards", Halifax won the award for Best Overall Mortgage Lender for the eighth year running, as well as the award for Best Large Loans Mortgage Lender. Birmingham Midshires was named Best Specialist and Buy-to-Let Mortgage Lender, and Lloyds TSB won the award for Best Overseas Mortgage Lender.

Sponsorships

Lloyds TSB was appointed the first Official Partner for the London Olympics 2012.

Lloyds TSB is also currently the official sponsor for the Asian Jewel Awards. The awards recognise the contribution made by the Asian community in Britain today. An example of this support is the bank's sponsorship of Peter Santamaria-Woods in motor racing.

External links

• Lloyds Banking Group
• Lloyds TSB
• Bank of Scotland
• Halifax