António Horta-Osório, Lloyds’ [LLOY] talismanic CEO, has announced that he will step down next year after a decade at the helm — news which is likely to impact Lloyds’ share price.
Since Horta-Osório’s appointment in 2011, Lloyds’ share price has weathered the aftermath of the 2008 financial crisis, Brexit and the coronavirus outbreak. While it seems unlikely his successor will face such an unprecedented run of events, nothing is certain in these unpredictable times.
What is certain, though, is that Lloyds has become a more efficient, profitable business under Horta-Osório. In many ways, he is leaving an easier task for his successor than he faced when he took on the role.
It is also true, however, that Lloyds’ share price dropped substantially during Horta-Osório's reign. The impact of macroeconomic factors beyond the CEO’s control should not be ignored here, but the bank’s lack of diversification also contributed to the decrease.
So, what shape has Horta-Osório left the bank in, and what does the next CEO need to do?
Horta-Osório and Lloyds’ share price
Horta-Osório earned acclaim for getting the bank through the financial crisis, cutting costs and shoring up profits. Yet over the course of his tenure, Lloyds’ share price has more than halved.
As a reflection of the UK economy, the bank is vulnerable to headwinds outside of its control. Whether that's political turmoil or disparaging economic data, it all takes an effect on Lloyds’ share price. Given that the UK is now facing an unprecedented recession, it is no surprise that Lloyds’ share price has failed to rally this year.
That said, Horta-Osório's reign has also seen several own-goals that have hit Lloyds’ share price. These include the PPI scandal, which saw the bank forced to pay out £4.3 billion in 2019, or around half of full-year profits.
Amount Lloyds paid out in 2019 on PPI
Still, Horta-Osório’s initiatives to streamline the bank could mean his successor is in for an easier time.
“In very trying circumstances he has created a strong and secure bank,” Lansdowne Partners’ Peter Davies told the Financial Times. “Unfortunately, markets may not reward this during his tenure, but . . . I suspect his creation of true value will be very evident in a few years’ time.”
“Unfortunately, markets may not reward this during his tenure, but . . . I suspect his creation of true value will be very evident in a few years’ time” - Lansdowne Partners’ Peter Davies
Will a move to wealth management help Lloyds’ share price?
The major criticism of Horta-Osório’s time at the top is Lloyds’ lack of diversification, which is perhaps most notable in its wealth management services. In an environment of ultra-low interest rates, this is hitting Lloyds’s share price and costing the bank. As the FT points out, each 0.25 percentage point the Bank of England slashes from rates wipes £150 million from Lloyds’ yearly net interest income.
All this is set to change in Lloyds’ next strategy update due this summer, though. Expectations are that the bank will expand its wealth and insurance divisions, which largely fall under the Scottish Widows umbrella. In 2019 this area saw £1.1 billion in profit, largely unaffected by changes to interest rates, so the move could bring good things for Lloyds’ share price.
Lloyds has also partnered with Schroders to launch Schroders Personal Wealth, a new financial planning business. Considering the size of Lloyds’ existing customer base, this represents a major new player on the market.
Should Horta-Osório’s successor skillfully manage this transition while keeping their eye on the bank’s fundamentals, Lloyds’ share price could see gains over the long-term.
|PE ratio (TTM)||13.37|
|Quarterly Revenue Growth (YoY)||-35.1%|
Lloyds share price vitals, Yahoo Finance, 13 July 2020
Who could be Lloyds’ next CEO?
Vim Maru, Lloyds’ head of retail banking, is the favourite to replace Horta-Osório. Maru followed Horta-Osório to Lloyds from Santander and would ensure a smooth execution of his predecessor’s strategy. From outside Lloyds, the FT suggests that Alison Brittain could be in with a shot. Brittain is a former Lloyds’ executive with substantial M&A experience, which could be valuable if Lloyds seeks to expand its activities.
And what’s next for Horta-Osório? While last week's announcement was styled as a retirement, expectations are that he’ll take a new role at a major European bank.
What do the analysts think?
Of the analysts tracking the stock on the FT, Lloyds’ share price has an average 40p target. Hitting this would see a 31.3% upside on the current price. Of those offering recommendations, the majority rate Lloyds as Outperform.
Whoever inherits the hot seat will undoubtedly have quite a challenge. Already, unofficial economic data has suggested the pace of recovery is likely to be slow. Then there is the looming challenge of Brexit to contend with. These are just two of the factors that will dog Lloyds’ share price in the short-term.
That said, if the new CEO can diversify the bank’s income streams, then Lloyds’ share price could finally break out of its slump over the next few years.