Lloyds TSB may be too good a story to last

Jeremy Warner On the coming crash in bank shares and why it pays for Cazenove to be low profile
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The Independent Online
The story at Lloyds TSB under that old warhorse Sir Brian Pitman, just gets better and better. Long before it was fashionable to be so, Sir Brian was a shareholder value obsessive, for ever focusing on cost to income ratios, return on capital and risk management systems. While other clearers hared into the more glamourous world of investment banking, destroying hundreds of millions of pounds of shareholder value in the process, Sir Brian stuck to his knitting - the boring old world of financial services. The two cultures would never mix, he insisted and the one would just detract from the other. He was right.

Now all bankers, realising the error of their ways, sing broadly from the same hymn sheet. But still Sir Brian manages to whip the socks off them. Last year he delivered an astonishing 87 per cent return to shareholders, taking account of share price appreciation and dividends. For what was already one of Britain's largest companies, that's going it. Executives generally like to flatter themselves when they announce figures, but it's hard to quarrel with or pick holes in those released by Lloyds yesterday. They are stunningly good. There is no other way to describe them.

There must be some clouds on the horizon, so what could they be? With plenty of cost cutting still to come from the merger with TSB, prospects for Lloyds are still as good as any. If there are clouds, they are of a more general nature. In declining order I would list them thus. First, one of the factors driving the banking sector ever higher is the supposed further scope for consolidation. Personally I regard this as pie in the sky.

There is virtually no chance of regulators agreeing, at least in the foreseeable future, to further significant consolidation in UK high street banking. Unlike many Continental countries, with their plethora of regional banks, Britain is not overbanked. Actually, we have too few banks, their market shares are already high enough and their profits are at levels which already invite the description of excess.

Second, new low cost competition is building up as never before. Plainly that hasn't affected the market leaders unduly so far, but however they attempt to defend their position, it seems certain that banking margins will shortly be under severe pressure from new entrants.

The third cloud is a more intangible one. There is a general belief in the stock market that banks have kicked the old boom to bust cycle, that they have learned how to manage their lending in a manner which should prevent the full calamity of bad debt provisioning that has marked business downturns in the past.

There are plenty of good reasons for believing this may be true. Better management is one, but if governments genuinely are better at macro economic policy, then the peaks and troughs in the business cycle may be getting less severe anyway. Even so, it's going to take a long time to convince many of us that bad bank lending really is a thing of the past. There's been too much recent experience of it to think that.

For all these reasons, the bull market in bank shares cannot be expected to last. Don't ask me to predict when it might end, however. As always, that's in the lap of the gods.

Cazenove, the City's oldest remaining independent stock broking partnership, has become so low profile in recent years that it would be easy to believe it might have disappeared altogether. In terms of publicity and vying for the public eye, it is so now far off the radar screen as to be virtually non existent. So what's happened to Cazenove, arguably still, despite its lack of visibility, the most famous name in the City?

At the time of Big Bang more than a decade ago, Cazenove deliberately went against the City herd, which was either merging like topsy in an ultimately fruitless attempt to mimic Wall Street's integrated investment banks, or selling up to Johnnie foreigner and retiring to the country with the labradors.

Instead, Cazenove opted to soldier on as before. Everyone said the partnership would inevitably wither and die, that there could be no place in the modern City for a firm of the old school like Cazenove, with its favour for a favour, socially networked style of operating.

An uncomfortable entanglement with the financial scandal of the decade, the Guinness affair, only compounded that view. Caz suffered the humiliation of being struck off the Government's list of favoured advisers for privatisation. People started to read the last rights. But actually it hasn't worked out that way.

A brief nose round the firm's Tokenhouse Yard premises, just behind the Bank of England, reveals the old firm still in rude health. The fact that you never read about Cazenove anymore is pursued by the firm as deliberate policy. Not for Cazenove the loud swaggering of the modern investment bank. It is for the client to grab the limelight, should he want to do so, not the adviser or broker, is the general approach. It seems to work.

If the truth be known, most of the behemoths of London's investment banking scene have long since given up on that traditional primary purpose of serving the interests of the client above all else. Their proprietary trading operations and wider global strategies make their own interests equally paramount. About the best the client can hope for is that his own interests will coincide with those of the investment bank. I exaggerate, perhaps, but only faintly.

Which may explain why at the last count Cazenove still had more corporate clients in the UK than any other securities house, including the giants of SBC Warburg, Deutsche Morgan Grenfell, Goldman Sachs, and Dresdner Kleinwort Benson. Even today, there's scarcely a major deal or takeover in the land where Cazenove is not present in some shape or form. Right now it is involved in both substantial active takeover plays, GUS's bid for Argus, and Glaxo Wellcome's merger with SmithKline Beecham, only you won't see its name on the press release.

Plainly, it must be doing something right. Part of that success is that clients still value the sort of self effacing voice of independence that Caz stands for, perhaps even more so now than in the past. Furthermore, Caz's powers of distribution, its ability to find takers for equity offerings, remain supreme. This is partly a self fullfilling thing. Because of its power as a corporate broker, Cazenove has the choicest of the new issues. As a fund manager, it always used to be said, you had to take your fair share of the dogs in order to receive the goodies.

There's less of that now. Rather the reverse. Cazenove famously resigned in protest as broker to the Telegraph a few years back after placing a large block of shares in the company. Shortly thereafter the newspaper cut its cover price and the shares plummeted. Caz was embarrassed enough to resign publicly and won plenty of plaudits in the City for doing so. The writ of the investor seems to run as supreme as that of the corporate client.

And that was about the last time we heard from Cazenove. Is it a good thing to be so low profile? Contrary to most popular thinking, the lesson seems to be that it certainly doesn't to do any harm.

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