Can Lloyds' minutiae man assure the City he's still in charge?

After a two-month break to combat stress and insomnia, Antonio Horta-Osorio returns tomorrow to face a bulging in tray of issues and a battle to restore the market's faith in him

For his own sake, Antonio Horta-Osorio must return to the helm of Lloyds Banking Group a reformed man.

Gone are the days when the immaculately groomed Portuguese chief executive would go through analyst models, line by line, as he obsessed over why their figures did not match the consensus expectations on Lloyds' fortunes.

"If he is as detailed a micromanager as we are led to believe, then you cannot run a FTSE 100 bank this way," says one industry expert. "You can multiply what he did with the analyst models by 1,000 different functions."

At the end of October, the extraordinarily driven 47-year-old was given time off on medical leave, only eight months into what was fast becoming a hugely successful stewardship. There was plenty of speculation that it was impossible for the apparently stressed-out insomniac to come back.

But, having turned around the fortunes of Santander UK, Horta-Osorio is used to defying expectations and tomorrow will be back in his spacious eighth-floor corner office overlooking St Paul's Cathedral. In his attempt to become a calmer fellow, Horta-Osorio presumably won't turn up so early that security hasn't even arrived, as was the case on his first day at Lloyds last year.

When he does switch on his computer, Horta-Osorio will find an inbox crammed with problems and situations that require quick resolution. No chief executive of a bank with a £1 trillion balance sheet can ease back into work after two months off, even someone who needs to rein in his fanatical attention to detail.

First up, he will have to revamp the group's executive structure. Horta-Osorio has vowed to cut back the number of people reporting directly to him and, according to a source close to Lloyds, will discuss his plans with the board possibly as early as this week.

This will effectively overturn one of his most marked changes to the Lloyds structure. His predecessor, Eric Daniels, according to Oriel Securities analyst Mike Trippitt, recognised that Lloyds was essentially three FTSE 50 companies – in insurance, retail and wholesale banking – and stuck to running what amounted to a holding company.

Trippitt, who had his own battles with insomnia about 10 years ago, adds that a return to this more delegated structure could be enough to convince sceptical investors that Horta-Osorio has removed enough pressure to not end up overworked.

"If you look at the interviews [that Horto-Osorio gave last month to confirm his improved health], they were at pains to say that this was not classic stress, but that he went through a terrible bout of insomnia," says Trippitt, who points to Horta-Osorio's otherwise spotless record. "At Santander, he put several big acquisitions – Bradford & Bingley, Alliance & Leicester – through quickly without having to take month or two off. He probably just worked himself too hard this time."

If he can convince the market that he is fully rested after a break that included an eight-day stint in The Priory, and deliver strong full-year results – perhaps without accepting a bonus – next month, Horta-Osorio will still have to regain his staff's trust.

Next up, then, he will have to explain himself to managers who have gone through so many ignominious goings-on since the credit crunch struck, not least the part-nationalisation that rescued the bank.

Many managers will struggle to empathise, having seen most of their life savings wiped out in share save schemes in the wake of the disastrous HBOS merger that led to the taxpayers' bailout of Lloyds. That, they will think, is more stressful than a lack of shut-eye.

"I think he has got a massive challenge," sighs one analyst, who admits that Horta-Osorio had got off to a rocketing start when he defied his peers and settled Payment Protection Insurance mis-selling claims. "He has got to get out and about: middle managers believed that they had this white knight who was going to take them to the promised land."

Edward Firth, a banking analyst at Macquarie Securities, says that George Culmer's appointment as finance director needs to be confirmed with a start date and details of his role. During his absence, Horta-Osorio suffered a major blow when Nathan Bostock, Royal Bank of Scotland's highly regarded head of risk, went back on plans to swap banks and lead Lloyds' wholesale division.

Although Culmer is highly unlikely to perform a similar U-turn and stay at the RSA insurance group, he is under contract until November. The current finance director, Tim Tookey, who has filled in for Horta-Osorio on top of his usual duties over the past two months, leaves in February. Lloyds' investors will not want to see a nine-month gap between finance directors, no matter how strong the existing team beneath Tookey is.

Similarly, the search to find another new face for wholesale banking will have to be swift. Particularly as Bostock's decision was such a personal embarrassment for Horta-Osorio: they had previously worked together at Santander and were considered to be quite tight.

Firth adds that Horta-Osorio must also wrestle back control of one of his major strategic plans. In June, Horta-Osorio announced a series of targets, such as more than halving the bank's international presence from 30 countries and reducing non-core assets to no more than £90bn, within three and a half years.

However, this agenda seems to have been hijacked barely a week after he took his sabbatical and only four months after the results of the review were unveiled. Tookey, as the stand-in, soon warned that the goals could be "delayed to beyond 2014" due to the economic downturn, perplexing the City which could not understand how quickly Lloyds had altered its strategy.

"He needs to revisit his strategic targets," argues Firth. "The bank started to back-pedal on the 2014 objectives soon after he left and he clearly needs to get revised realistic targets out in the market as soon as possible – certainly by the full-year results." That would certainly reinstate some investor faith in Horta-Osorio, as well as demonstrate to the board that, although he may not any longer be minutiae man, he is still very much in charge.

Already, that's quite an exhausting list and suggests that Horta-Osorio will soon be back to his 18-hour days and weekend meetings. But, there is at least one quite detailed issue that some in the market feel is a priority for Lloyds: its loans-to-deposit ratio.

At the moment, this stands at just over 140 per cent. So, for every £100 deposited in Lloyds, it will lend £140. Although a significant improvement on the 154 per cent at the start of 2011, this still means that Lloyds is raising money heavily, presumably, from the international wholesale markets

Bruce Packard, a Seymour Pierce analyst, argues: "This means Lloyds getting money from countries with a surplus, oil- and commodity-rich countries. It doesn't feel right that Asian savers on less than GDP per capita of $10,000 are funding buy-to-let property investors in the UK."

Packard thinks that the ratio needs to be taken below 100 per cent and that will require shrinking the loan book, which might even require something as radical as no longer authorising interest-only mortgages. "Look at Germany," he says. "They have a sensible economy without interest-only mortgages. About a quarter of Lloyds' houses are 90 per cent or more loan to value."

Whether Horta-Osorio would be so brave as to end a mortgage that is so engraved in the nation's psyche, is questionable. If he did do it, there would be no question that the suave banker from Lisbon is back in control of his empire.

A year in the life of a bank and its boss

17 January

Antonio Horta-Osorio joins Lloyds' board as chief executive to succeed Eric Daniels on 1 March.

March

Restructure that sees life, pensions & investment and general insurance report directly to Horta-Osorio.

11 April

Independent Commission on Banking recommends Lloyds divests more than 600 branches.

20 April

Banks lose appeal for judicial review into PPI misselling.

5 May

Writes-off £3.2bn against potential PPI misselling claims.

30 June

Horta-Osorio unveils results of strategic review, including stiff financial targets to be hit by 2014.

19 September

Financial Director Tim Tookey resignation announced.

2 November

Horta-Osorio takes temporary sick leave; Tookey fills in.

14 December

Horta-Osorio's return confirmed; The Co-operative Group confirmed as preferred bidder for branches.

9 January

Back at work.

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