April 28, 2017

AHO new world

by Breakingviews.

Lloyds Banking Group has hit peak Antonio Horta-Osorio. The UK lender’s recovery under its current chief executive has been impressive, however one slices it. But from here, his efforts become relatively less important in driving Lloyds’ returns than what happens to the British economy.

The UK bank is outperforming on several measures that investors care about. The margin it makes between interest paid and received increased in the first quarter to 2.8 percent, beating both Lloyds’ own target of just over 2.7 percent, and analysts’ estimates. The gold dust that is equity capital is also mounting – Lloyds now says it will get close to the top of its estimated range for generating new equity through earnings this year. That foreshadows more generous dividends.This is clearly a different bank from the one Horta-Osorio inherited. Bad loans were 10.3 percent in 2010, compared with 1.8 percent now. Risk-weighted assets have almost halved. The British government, which still has a 2 percent stake left over from its 20.3 billion pound bailout after the financial crisis, has now made its money back – even if that’s just a symbolic milestone – and the stock trades comfortably above its book value.What comes next can only be less fun for an ambitious bank chief. Lloyds has been reducing the size of its loan book for years, meaning it could drive returns by cutting costs and assertively managing what it pays savers. That internally-driven story is about to change to an external one – both because Horta-Osorio expects to start adding new mortgages more zealously by the end of the year, and because costs equivalent to 47 percent of income are almost as low as they can go.

That doesn’t mean the Portuguese banker is on the way out. He says the opposite. It does, though, mean that the returns that come to Lloyds shareholders will be less driven by Horta-Osorio’s talents, and increasingly by the wider UK economy, which has proven hard to predict since the Brexit referendum last year. Even if Horta-Osorio doesn’t decide this is as good as it gets, his investors should give the question serious thought.


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