Jeremy Warner's Outlook: Jury still out on HBOS's customer-led strategy

Steel revival; Shell appointment; Age of retirement
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The Independent Online

Few British banks can boast growth in profits as robust as 20 per cent right now, yet this is the number HBOS is promising to achieve for the first half of the year. Unfortunately, that didn't stop the stock market concentrating on the negative in the bank's trading statement yesterday; net interest margins are going to be lower than the bank anticipated last February, in part because of the higher funding costs brought about by rising interest rates, while the bank's decision to exercise caution in the mortgage market means it won't quite reach its target of 20 per cent return on equity.

Meanwhile, that very same decision to reign back on mortgage lending means the bank's share of net lending will be below 20 per cent both for the first half and the full year. That still makes HBOS market leader, but it is a lot lower than the 25 per cent market share achieved last year.

Still, in his own terms at least, James Crosby, the chief executive, is delivering just as promised. He committed the bank to a customer led strategy and it seems to be working. Both revenues and profits are growing strongly. The bank is making excellent progress in winning market share from the soft under belly of the clearers in everything from current accounts to small business banking and insurance.

The discomfort HBOS is already causing competitors is perhaps reflected in the fact that both Barclays and HSBC have recently changed their heads of retail networks. HSBC is losing ground in nearly all aspects of its UK retail franchise while even Barclays is struggling to achieve any significant top line growth. HBOS by contrast seems to be firing on all cylinders, particularly in non interest income, where its decision aggressively to attack the fee based corporate lending market at a time when others were drawing back, is for the time being paying off handsomely. From Philip Green to Richard Desmond, the bank has been supremely successful in attracting active corporate players with big funding needs.

Regrettably, none of this has helped the share price very much, which for the past three years has traded much in line with the stock market. Going further back, HBOS has been a significant underperformer, in marked contrast to HSBC, Barclays and Royal Bank of Scotland Group, all of which have significantly outperformed the rest of the market over the past five years. In part, this is because of HBOS's high exposure to the mortgage market, which is hugely more competitive than it used to be, causing a steady erosion in margins, and is plainly very vulnerable to any correction in house prices.

But it is also because companies that invest heavily in long term growth tend to be lacking in short term payback. In mortgage lending, Mr Crosby is pulling back a little, but in virtually everything else, he's going hell for leather. This obviously carries an investment cost.

Rapid growth is also difficult to manage and often ends badly, particularly in banking. Just ask Barclays, which spectacularly plunged into the red in the early 1990s after a period of unrestrained growth. I'm not suggesting that what HBOS is doing is in any way comparable, but Mr Crosby should perhaps take lessons in shareholder value from his most famous borrower of the moment - Philip Green. Mr Green runs companies in a manner designed to deliver big short term paybacks. That's why HBOS is so keen to lend to him.

Steel revival

One swallow does not a summer make and while the news that Corus has actually made a profit is obviously good for all concerned, no one should get too carried away by this apparently miraculous return from the grave just yet. The suspicion is that the company's first operating profit since the ill-fated merger of British Steel and Hoogovens in 1999 was forged not so much in Port Talbot but more in China, where booming demand for steel has sucked up surplus world steel-making capacity, enabling Corus to lift its prices by a third so far this year.

The Corus line is that the "restoring success" initiative launched a year ago by its recently installed, French born chief executive, Philippe Varin, is also contributing to the turnaround, yet the truth is that so the effect is little more than marginal. As Alisher Usmanov, the Russian steel magnate who has been stalking Corus, has observed, the company would need to be seriously mismanaged not to be making money at current world steel prices.

To his credit, M Varin is acutely aware that what the Chinese bring us the Chinese can also take away, so he is not placing too many of his ingots in one basket. The real test of Corus's ability to sustain profits will come if and when the Chinese economic miracle comes to a shuddering halt and world steel prices tumble in its wake.

There are heartening signs however. Corus reckons it has finally tailored its UK steel-making capacity to its domestic customer base. Today, the main stripped steel plant at Port Talbot employs a fifth of the people it did two decades ago to produce twice the amount of steel. Yet even after 14,000 jobs cut from the body corporate since the merger in 1999, there are still surely further productivity gains to be made before the company can truly stand comparison with the best in the world. For instance, the shift pattern at Corus allows the average shop floor worker to spend more time on holiday than at work. It is unlikely Mr Usmanov runs his mills in such an enlightened manner.

M. Varin has only been in charge for 13 months and he says with a twinkle in his Gallic eye that his one regret is that he wasn't part of the turnaround story earlier. Like his national football team, he might reflect that pride sometimes comes before a fall.

Shell appointment

The appointment of Peter Voser to succeed the ousted Judy Boynton as Shell's new finance chief drew a predictable howl of derision from all the usual suspects yesterday. This is because Mr Voser was a Shell lifer before his brief two years with ABB in Switzerland, making Shell vulnerable to the claim that it sill hasn't taken on board the need for root and branch change despite the disasters of the last six months.

Nothing could be further from the truth. Mr Voser only left Shell after being passed over for the top finance job in favour of Ms Boynton, who was an acolyte of Sir Philip Watts. Indeed, it is possible to imagine that had the cool headed and accessible Mr Voser got the job, the reserving débâcle may never have happened, or rather it would have been gripped at a much earlier stage.

It is not the finance department's job to audit the oil reserves, but Mr Voser would have seen the potential for calamity coming a mile off. Mr Voser's existing in-depth knowledge of Shell and his experience in helping to turn around ABB makes him an almost perfect appointment. At last Shell has managed to do something right.

Age of retirement

Re: my comment the other day on the row over how to implement the European directive on age discrimination, a reader e-mails to point out that there is in fact no statutory retirement age, only an age beyond which employees lose the right to redundancy payments and protection from unfair dismissal. The law also allows employers to have a mandatory retirement age, which in most cases is 65. This may seem to add up to pretty much the same thing, so the point still stands that the CBI is burying its head in the sand by refusing to accept the case for reform. Even so, removing an employer's right to impose a mandatory age of retirement is obviously slightly different from abolishing a statutory age of retirement, so apologies for my intellectual laziness. My strictures were none the less not entirely without impact. I'm told the CBI is quietly shifting its position to argue that the default age for retirement be raised from 65 to 70. This is plainly not as good as abolishing it entirely, but it marks an advance on the CBI's previous, positively troglodyte view.

jeremy.warner@independent.co.uk

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