View from City Road: Why Mr Pitman makes other bankers green

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The Independent Online
Belatedly, other bankers are beginning to learn about the need to deliver shareholder value; Brian Pitman, chief executive of Lloyds, has actually done it. By a long, long way he is the most successful British banker of his generation; it would be hard to imagine a more striking contrast than the story of Lloyds with its rock- solid record of earnings growth and that of its high street banking peers, where recent history has been one of unmitigated disaster.

The pressing question for Lloyds and Mr Pitman as they entered the 1990s was always going to be how to build on such a remarkable achievement. Most of it was on the back of a deliberate policy of contraction; there's a limit to how long you can go down that route before your profits start shrinking with your business.

How, then, to keep ahead of the game? The first attempt - the abortive bid for Midland - always looked too ambitious and controversial to succeed, though there was plenty of support for it in the City. Mr Pitman was right about the need to rationalise high street banking in Britain - his vision was utterly correct - but in truth he was never going to be allowed to do it; no government in its right mind could have sanctioned such a merger.

The second attempt, yesterday's agreed pounds 1.8bn takeover of Cheltenham & Gloucester Building Society, is a more pragmatic and infinitely safer approach to the same problem. Even if it had been allowed, the Midland deal would have been fraught with risks and dangers. The apparent cost savings could easily have ended up getting swamped out by the cultural, managerial and technical difficulties of merging two such different creatures.

By contrast, the Cheltenham & Gloucester takeover looks to be a marriage made in heaven, a perfect match. In Cheltenham & Gloucester, Lloyds has managed to get the pick of the bunch, a building society which, despite its present mutual status, is very much like Lloyds in its culture and values; it has the lowest costs in the industry and has concentrated on securing a low-risk portfolio of relatively wealthy customers.

It's hardly any surprise that Andrew Longhurst, its smooth-talking chief executive, is the most highly paid officer in the building society movement; he, like Mr Pitman in banking, has also been its most successful. Already it is widely assumed in the City that with no obvious internal successor when Mr Pitman bows out as chief executive next year Mr Longhurst will step easily and naturally into his shoes.

The arithmetic, too, makes this a highly attractive deal for Lloyds. Even on historic earnings, the price being paid looks cheap against the market value of Abbey National. If you take into account the fact that Cheltenham & Gloucester will have another year of earnings growth under its belt by the time the deal goes through, it looks doubly so.

If it is possible to criticise this deal at all from Lloyds' point of view, it might be said that it looks a little on the defensive side, perhaps a little too conservative and unexciting. There are cost savings to be had from the merger, but not dramatic ones; Cheltenham & Gloucester will be run as a largely autonomous, stand-alone business within the group.

Shareholders also have every reason to be worried by Mr Pitman's determination to spark a price war in the mortgage market. Why buy a business just to slash its margins?

It may be, however, that Mr Pitman is right to insist this would have happened anyway; Lloyds and Cheltenham together stand a very good chance of seeing it through to victory and ending up on top. Mortgage lending is in any case both a growth and highly lucrative area of the lending market.

Could Lloyds have employed its capital more profitably? The answer has to be that if you are in the business of lending, probably not.

It's no wonder that other bankers are green with envy; it looks as if Mr Pitman, after a long search for new goals and horizons, has outmanoeuvred and outclassed them all over again. It seems a fitting swan song.