Lloyds TSB Group plc

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Lloyds TSB Group plc

71 Lombard Street
London, EC3P 3BS
United Kingdom
Telephone: (44) 20-7626-1500
Fax: (44) 20-7356-1731
Web site: http://www.lloydstsbgroup.co.uk

Public Company
Incorporated: 1865 as Lloyds Banking Company Limited
Employees: 77,540
Total Assets: £236.5 billion (2001)
Stock Exchanges: London New York
Ticker Symbol: LLOY (London); LYG (New York)
NAIC: 522110 Commercial Banking (pt); 522210 Credit Card Issuing (pt); 522120 Savings Institutions (pt); 523991 Trust, Fiduciary, and Custody Activities (pt); 522320 Financial Transactions Processing, Reserve, and Clearinghouse Activities (pt); 522390 Other Activities Related to Credit Intermediation (pt); 522220 Sales Financing (pt); 522291 Consumer Lending; 522292 Real Estate Credit (pt); 522310 Mortgage and Nonmortgage Loan Brokers; 524113 Direct Life Insurance Carriers; 525110 Pension Funds

Lloyds TSB Group plc is one of the Big Four British clearing banks in the United Kingdom. Through the bank and its subsidiary and associated companies, Lloyds offers a wide variety of international banking and financial services. It has almost 3,000 branches throughout the United Kingdom, and its international business is conducted through approximately 500 offices in 47 countries, including the United States, Canada, Japan, Australia, Brazil, and Egypt. Long considered a conservative banking house, Lloyds has grown increasingly innovative since the early 1970s, often taking the lead among the Big Four clearing banks in offering new financial services and products and in developing an international presence. The present company arose from a merger of Lloyds and the TSB Group, a deal that catapulted the company into its present position as the second largest bank in Britain.

The Birth of a Banking Giant

Sampson Lloyd II worked for 40 years in the family iron trade in Birmingham before founding Taylors and Lloyds in partnership with John Taylor in 1765. Taylor was a wealthy Unitarian who was a maker of buttons and snuff boxes; Lloyd was a prominent Quaker whose father had settled in Birmingham in 1698. Each man’s eldest son was also a partner in the bank, and two of Lloyd’s other sons eventually joined it as well.

Taylors and Lloyds opened its accounts in June 1765. Just five years later, the bank’s two junior partners set up their own banking house in London with two other businessmen, forming Hanbury, Taylor, Lloyd and Bowman. This bank then served as the Birmingham house’s agent. In 1775 the Birmingham bank had 277 customers.

Sampson Lloyd II had apprenticed to a Quaker businessman in Bristol before joining his father’s iron firm. He was married twice and had six children. Little is known of his son and partner Sampson III, who was the last Lloyd to be a partner in both the Birmingham and London houses. Sampson III and his wife had 16 children and were known to have entertained James Boswell and Dr. Samuel Johnson. Sampson’s half-brother Charles was the more important of the two, best known for his intellect and remarkable memory. In the final years of the 18th century and the early years of the 19th, Charles was the principal figure in the Birmingham bank. Charles tried mightily to mold his eldest son, Charles II, into a banker, but his efforts failed. His second son, James, became a partner in the Birmingham bank in 1802 and was followed in the mid-19th century by his own three sons.

Strategic Partnerships in the 19th Century

The Bank of England had a monopoly on joint-stock banking until 1826, when Lord Liverpool, the prime minister, sponsored a new law allowing joint-stock banking, except within a 65-mile radius of London. Seven years later, joint-stock banks were allowed within the 65-mile circle, but in 1844 a stricter law virtually stopped further joint-stock banks from being founded. During those brief lenient years, 120 “joint-stocks” were founded in England and Wales and of these, 20 eventually became part of the Lloyds group. By the time they amalgamated with Lloyds, these 20 banks had a total of approximately 350 offices.

John Taylor died just ten years after founding Taylors and Lloyds. His son John, Jr., was 27 at the time of the bank’s founding and remained a partner in both the Birmingham and London banks until he died in 1814. His oldest son, John, never entered banking and his two other sons, James and William, were the last Taylors involved with the firm. When James died in 1852, his son was offered partnerships in the Birmingham and London houses but turned both down. Thus the Taylor family’s connection to the bank ceased. The Birmingham bank became Lloyds and Company, and the London house became Hanburys and Lloyds. The latter merged with Barnetts, Hoares and Company in 1864 to form Barnetts, Hoares, Hanbury and Lloyds. This transaction brought Barnetts, Hoares’ sign, a black horse, to Lloyds, where it continues to be the bank’s symbol.

In 1865 Lloyds and Company, joined by Moilliet and Sons, was incorporated as Lloyds Banking Company Limited. With the Birmingham bank’s change to joint-stock ownership, there came an infusion of new blood into the company. The first chairman of Lloyds Banking Company, Timothy Kenrick, was a Unitarian businessman and a director of the Midland Railway Company. Although he had married into a banking family, he had no banking experience, but was widely respected in Birmingham for both his business acumen and philanthropic activities. During Kenrick’s term as chairman, the bank absorbed four other banks.

Sampson Samuel Lloyd, a great-great-grandson of Sampson Lloyd III, became chairman in 1869. He oversaw Lloyds’ mergers with seven banks, including its two London agents, Bosanquet, Salt and Company and Barnetts, Hoares, Hanbury and Lloyd, both in 1884. After these amalgamations, which gave Lloyds a foothold in London and entrance to the clearinghouse system of clearing checks and settling balances, the bank was known as Lloyds, Barnetts and Bosanquets Bank Limited. Although the bank’s branches were all within a 50-mile radius of Birmingham and the head office remained in that city, its center of activity was rapidly shifting to London. Beginning in 1899, Lloyds’ board would meet alternately in London and Birmingham, but by 1910, the board met only in London and all head office business also was transferred there.

Two years after the two important London mergers, Sampson Lloyd handed over the chairmanship to Thomas Salt, whose family had been in banking for generations. Salt had been a director of the bank since 1866, when the bank at which he was a junior partner, Stafford Old Bank, was sold to Lloyds. Early in Salt’s term, the bank took the title of Lloyds Bank Limited. In Salt’s 12 years as chairman, the bank absorbed 15 banks and grew from 61 offices in 1886 to 257 in 1898.

Also deserving of credit for this growth was Howard Lloyd, who served as general manager from 1871 to 1902. A direct descendant of Sampson Lloyd II, Howard Lloyd held many jobs in the bank, gradually working his way up to secretary and, finally, to general manager. Lloyd successfully oversaw the melding of Lloyds’ two London agents into the Lloyds framework, calling those two amalgamations “the most important forward step of the bank’s history.” At the end of his tenure in 1902, the bank had 267 offices. Lloyd was fond of saying that Lloyds Bank was to be not necessarily the biggest bank, but the best bank. He stands out in the history of Lloyds as a tireless administrator who handled an impressive variety of functions.

Modernization: 1900–45

John Spencer Phillips became chairman in 1898. The eldest son of a rector, Phillips had been a partner in the Shrewsbury and Welshpool Old Bank, which was acquired by Lloyds in 1880. He became a member of Lloyds’ board and served as deputy chairman for eight years before assuming the chairmanship. Nine years before becoming chairman, Phillips had been instrumental in negotiating the amalgamation of the Birmingham Joint Stock Bank, which had long been considered Lloyds’ chief competitor in that city. The last chairman to act also as chief executive, Phillips oversaw 15 amalgamations. An excellent public speaker, he was the first to offer commentary on national economic affairs at the annual meeting.

In June 1903, Lloyds opened secret merger negotiations with the Manchester and Liverpool District Bank, but public sentiment against the merger was so strong that the idea was dropped. Manchester citizens were particularly outspoken, objecting to their city’s losing its separate identity.

After Phillips died in office in 1909, he was succeeded by Richard Vassar-Smith. His 13 years were a period when, for some time, Lloyds was the biggest bank in England. A director of the Worcester City and County Bank, Vassar-Smith was selected to become a director of Lloyds Bank when the smaller bank was absorbed by Lloyds in 1889. Vassar-Smith was heavily involved in governmental discussions about wartime preparations, and he served as chairman of the 1917 Treasury Committee on Financial Facilities. In recognition of his contributions to the war effort, he was made a baronet in 1917.

World War I saw the formation of the Big Five, a group of large clearing banks that included Lloyds. Although the banks still called themselves the London clearing banks, they were in fact national banks.

Company Perspectives:

We aim to set an example in the conduct of our business. We demand honesty and integrity in everything we do, and will not do business if our standards are endangered. We greatly value our good reputation.

Several key acquisitions and amalgamations marked Vassar-Smith’s years as chairman. In 1914 Lloyds absorbed the Wilts and Dorset Banking Company, which had 200 offices, many in areas where Lloyds already had a branch. In 1918 came the merger of two huge banking concerns: Lloyds with its 888 offices merged with the Capital and Counties Bank, which had 473 offices. Although there was substantial overlap of office locations, each did have offices in areas in which the other had little or no representation. Capital and Counties also had attractive foreign connections. It participated in a bank in France as well as in agencies for banks in Canada, Mauritius, and Brazil. The amalgamated bank, whose title remained Lloyds Bank Limited, had a board of directors consisting of the 19 members of Lloyds and seven from the Capital and Counties board. In 1918 Lloyds had just more than 13 percent of all bank deposits in Britain.

Poet T.S. Eliot joined Lloyds’ colonial and foreign department at the head office in 1917, where he worked as a bank clerk. When Eliot’s health deteriorated in the fall of 1921, the bank gave him a three-month leave, during which he finished The Waste Land. He left Lloyds for a better-paying job at another bank in 1925.

In the year and a half after the end of World War I in November 1918, there was a sharp upturn in economic activity, but it was succeeded by a lengthy recession. The bank’s business mirrored these broad swings in the economy. With the end of the war, official restrictions on branch openings were lifted and, in 1919, Lloyds opened or reopened 203 offices. The bank also acquired the 34 offices of the West Yorkshire Bank that year.

With the 1921 acquisition of Fox, Fowler & Company, the last country bank to issue its own note, Lloyds added 55 additional branches and agencies in Somerset, Devon, and Cornwall. By 1923, Lloyds had become a banking giant, with 1,626 offices throughout England.

Nationwide, public concern was mounting over the large number of bank amalgamations, which came to a quick halt after the Treasury Committee on Bank Amalgamations issued its report in 1918. The committee’s recommendations for minimizing future amalgamations, although never formally made law, became the country’s unwritten law. Henceforth, every amalgamation would require treasury approval. The treasury usually permitted the acquisition of small banks by large concerns, but it was clear that the amalgamation of any two of the Big Five would not be permitted.

Lloyds averted a serious banking crisis with its 1923 takeover of Cox & Company, West End army bankers with branches in India, Burma, and Egypt. Lloyds also took over Henry S. King & Company, which Cox had recently acquired. These amalgamations were made by order of the Bank of England to avoid an expected run on Cox & Company.

After Vassar-Smith’s death in 1922, J.W. Beaumont Pease, who had served as deputy chairman throughout Vassar-Smith’s tenure, succeeded him. Another direct descendant of Sampson Lloyd II, Pease had been a partner in the established and prosperous private bank of Hodgkin, Barnett, Pease, Spence & Company of Newcastle upon Tyne. When that bank amalgamated with Lloyds in 1903, Pease was elected to Lloyds’ board.

During Pease’s lengthy term, Lloyds gained a reputation for its conservatism. When Pease retired in 1945, Lloyds had 60 more branches than when he took office. Although the bank had expanded during the 1920s to nearly 1,950 branches in 1931, many had to be closed during the Depression and World War II.

The Depression made its most serious dent in Lloyds’ lending business, with a two-fifths loss of income in this area. Total earnings reflected this loss, with a two-fifths reduction in the overall figure. In 1933, gross profits fell to their lowest level since the turn of the century. Economizing measures were instituted, including a renewed dedication to mechanization and the development of a standard formula for determining which branches were to be closed. In the mid-1930s, approximately 20 branches a year were mechanized, using machines that would post entries on an account and strike a balance.

In the late 1930s, elaborate plans were drawn up to keep the bank functioning in case of war. The clearing banks issued a war preparation report stipulating that in case of war, all ordinary competition between banks would cease entirely. Throughout the war, 641 Lloyds offices were damaged and 32 destroyed. Of the latter, the vaults were destroyed in only two. Between 1940 and 1945, 214 offices were closed and seven opened (a number of those closed were reopened after the war). In addition, three Lloyds branches were overrun by enemy troops during the war: in Jersey and Guernsey in the Channel Islands and in Rangoon, Burma.

Throughout World War II, deposits and the total number of accounts increased each year. Deposits doubled between 1939 and 1945, but with prices rising steadily, real growth was considerably less. Lending activity fell, but this was offset by an increase in investments, especially treasury deposit receipts. For the period 1939–45, gross profits tripled. Lloyds had inherited the army’s business from Cox & Company; at one point during the war, the influx of newly commissioned officers forced the army pay department to work seven days a week.

Postwar Boom: The 1940s and 1950s

Lord Balfour of Burleigh succeeded Pease as chairman in 1946. A member of an old Scottish family, he had been named chairman of the National Bank of New Zealand in 1938 and also served as a director of other banks and organizations. Lord Balfour, or “B of B” as he was called, started the practice of having regular dinners at which the chairman, a few directors, and small groups of managers could freely exchange ideas.

Key Dates:

1765:: Sampson Lloyd II and John Taylor found Taylors and Lloyds.
1770:: Hanbury, Taylor, Lloyd and Bowman is formed.
1865:: Lloyds and Company is incorporated as Lloyds Banking Company Limited.
1898:: John Spencer Phillips becomes chairman of Lloyds Bank.
1918:: Lloyds merges with Capital and Counties Bank.
1921:: Lloyds acquires Fox, Fowler & Company.
1946:: Lord Balfour succeeds J.W. Beaumont Pease as chairman of Lloyds.
1973:: Lloyds Bank International is formed.
1986:: Lloyds Merchant Bank is formed.
1988:: Lloyds acquires controlling interest in Abbey Life Group PLC.
1995:: Lloyds Bank Group merges with TSB Group to form Lloyds TSB Group plc.

The immediate postwar years brought an upturn in the economy. Between 1945 and 1951, total loans almost tripled. Deposits, however, increased by only about a third, a considerably slower rate of growth than during the war, and virtually no real growth at all due to inflation.

Sir Oliver Franks, who had served as Britain’s ambassador to the United States from 1948 to 1952, succeeded Lord Balfour as chairman in 1954. The former head of an Oxford college, Franks was one of the finest intellects ever to serve the bank as chairman. Due to the essentially conservative nature of the bank and continued governments controls, however, Franks was not able to make as many changes as he would have liked.

In 1958 the government abolished restrictions on bank lending and the clearing banks did away with their self-imposed limits on competition among themselves. Lloyds continued to expand. Its total number of branches in 1959 was 1,851, compared to 1,711 in 1951, and its employees had increased from 17,690 in 1951 to 20,160 in 1959.

After Oliver Franks’s retirement in 1962, Harald Peake, a director since 1941 and a vice-chairman since 1947, was elected chairman. Peake had a varied background in business, having served as chairman of a steel company and director of many other companies. He was a key player in negotiating the purchase of property from the Commercial Union Assurance Company, which allowed for expansion of the head office.

International Expansion in the 1960s and 1970s

During the 1960s Lloyds developed rapidly. In 1963 it set up Lloyds Bank Property Company to conduct property development schemes that would incorporate branch premises, and in 1967 Lloyds acquired Lewis’s Bank from Martins Bank. Lewis’s had branches in ten Liverpool department stores. Altogether the bank opened 456 new branches, bringing the total at decade’s end to 2,307.

Peake is best remembered for a failed attempt at merging Lloyds with Barclays and Martins Bank, a move the monopolies commission deemed would be against the public interest. Barclays finally acquired Martins, making Lloyds the smallest of the Big Four London clearing banks rather than the third largest among the Big Five.

Eric O. Faulkner, who had spent 32 years in banking at Glyn, Mills and Company and was considered something of a radical, was elected chairman of Lloyds in 1969. He provided a new perspective on how the bank should continue to grow.

One of Faulkner’s priorities was the development of an international banking group. He created Lloyds Bank International by merging Lloyds Bank Europe with the Bank of London and South America to form the Lloyds and Bolsa International Bank in 1971, in which Lloyds held a 51 percent interest. Two years later, it became a wholly owned subsidiary, marked by a name change to Lloyds Bank International. Lloyds expanded its geographic base considerably during the next several years to include West Germany, Switzerland, the Middle East, Australia, Canada, and the United States in its international network. Early in 1986 Lloyds Bank International was merged with the clearing bank to better meet the demands of a worldwide financial market.

To handle its growing volume of transactions, Lloyds became the first British bank to transfer all of its branches to a common computer accounting system in October 1970. This helped immensely as the bank adjusted to the government’s introduction of decimal currency in February 1971.

Competition among banks intensified after the Bank of England radically changed its control of the banks in 1971, when it introduced a new policy that included removal of a maximum ceiling on bank lending. In this newly competitive environment, Faulkner oversaw many new business ventures. An insurance department was established in 1972, and a year later Lloyds Leasing was started.

By 1978 Lloyds Bank International had offices and subsidiaries in 43 countries. By the end of that year, a little more than half of Lloyds Bank Group’s consolidated balance was attributable to the bank’s many subsidiaries. In a 1971 interview with The Banker, Faulkner echoed Harold Lloyd’s words of nearly a century ago when he said, “All these objectives for our domestic business amount simply to being not the largest but the best of the clearing banks.”

Sir Jeremy Morse succeeded Faulkner as chairman in 1977. At 47, he was one of the youngest chairmen of a clearing bank in recent history. Morse had served as chairman of the deputies of the International Monetary Fund’s Committee of Twenty, where he was involved in efforts to reform the world’s monetary system. He had served as Lloyds’ deputy chairman for 16 months before assuming the chairmanship.

Diversification in the 1980s

In 1979 Lloyds became the first clearing bank to move into the home loan market. Seeking to fill a gap in the home-loan services offered by the British building societies, Lloyds announced that it would consider loans greater than £25,000 and up to £150,000. The building societies’ maximum home loans were £25,000.

Two years later Lloyds Bank and American Express announced plans to issue a joint sterling traveler’s check from their offices and branches around the world. Lloyds Bank further diversified in 1982 with the creation of Blackhorse Agencies, a real estate agency business that had as its nucleus a Norfolk-based practice acquired by Lloyds. By 1989, Blackhorse had 563 offices. Competition between the big London banks intensified in the mid-1980s when Lloyds and other clearing banks announced that they would begin offering free banking for clients whose current accounts remained in the black.

In 1986 Lloyds Bank PLC offered £1.27 billion in a hostile takeover bid for Standard Chartered PLC, Britain’s fifth largest bank, but was rebuffed after East Asian and Australian investors made last-minute purchases of Standard Chartered shares. Although Standard Chartered’s profits had lagged behind other large British banks for some time, Lloyds was sorry to lose the chance to acquire Standard Chartered’s many interests in the Far East, especially in Hong Kong.

Just three months after its unsuccessful bid for Standard Chartered, Lloyds announced that it would start its own brokerage firm rather than acquire a brokerage firm, as the other Big Four clearing banks had done. That same year, Lloyds formed a new subsidiary, Lloyds Merchant Bank, to handle its capital market and merchant banking operations.

In 1987 Lloyds announced that it would move 1,400 head office staff from London to Bristol, where it would build a two-phase office development in a park-like setting. Due to the impact of Third World loan losses, Lloyds Bank incurred a pretax loss in 1987 of some £248 million, compared to profits of £700 million the year before. Lloyds Chairman Jeremy Morse told the Wall Street Journal in early 1988 that Lloyds was “refocusing” its international business on more profitable services such as foreign exchange, trade finance, investment management, and private banking and that it was moving away from wholesale lending to countries and large corporate borrowers.

In 1988 Lloyds’ profit figures were handsomely turned around, with both pre- and post-tax profits at record levels. The biggest Third World debtor, Brazil, resumed interest payments in 1988 and several other countries began programs to reduce their debts.

That year Lloyds became the second British bank to offer a debit card, a card that linked directly to a user’s bank account, allowing transactions to be debited just as if a check had been written. Also in 1988, Lloyds made a bold competitive move when it began offering interest on basic checking accounts. Although the idea was common in the United States, British banks had competed mainly by cutting fees and adding new services. Analysts saw the move as a predictable response to the building societies’ chipping away at the bank’s dominance in checking accounts. At year’s end, Lloyds acquired a controlling interest in Abbey Life Group PLC, a British life insurer, by merging five of its businesses with Abbey Life to create Lloyds Abbey Life. This bold move into a new market was a part of Lloyds’ strategy to attract new business and raise earnings by offering customers a wider range of services.

The Merger with TSB Group in 1995

The British banking industry was hit hard by a recession in the early 1990s. Many businesses throughout England were caught off-guard, and the resulting high numbers of loan defaults and bankruptcies, along with a significant decline in demand for business and mortgage loans, put an enormous amount of pressure on Lloyds. Although Lloyds was still able to enjoy tremendous profit margins—the bank’s net earnings exceeded £1 billion in 1993—its market share value began to slip by 1994, as more investors turned away from retail banking in favor of the more robust securities trading sector. The bank was faced with a difficult decision: It could either turn its profits over into high dividends for its shareholders, or it could try to jumpstart its sagging business through strategic acquisitions.

To the surprise of nobody, Lloyds chose the latter course. Still smarting from its failed bid to take over Midland Bank in 1992, Lloyds set its sights on a much larger prize: the TSB Group. In many respects, the union represented a perfect fit. One key advantage of the merger was geography; whereas Lloyd’s 1,800 branches helped give the bank a dominant position in southern England, TSB was a major presence in the north, with 1,100 branches in northern England and Scotland. The two banks also catered to two distinct segments of the banking industry, with Lloyd’s serving a predominantly wealthy client base, while TSB focused exclusively on the middle-class market.

Most important, the deal created a much larger banking entity, one that could remain competitive in the emerging global economy. The market capitalization of the joint enterprise was nearly £15 billion, and the scope of its combined operations made it the second largest bank in England. At the same time, the restructuring allowed the new company to streamline much of its operational costs, making room for a projected savings of £350 million per year by the end of the decade. The decision to close 150 bank branches in September 1996 did create a great deal of concern among labor groups, who feared that the bank might eventually close up to 1,000 branches and terminate more than 10,000 positions. The lack of overlap between the Lloyds and TSB networks, however, along with the group’s continued commitment to its core retail banking business, proved these worries to be unfounded.

The genius behind the merger was Sir Brian Pitman, former Lloyds CEO and new chairman of Lloyds TSB. As CEO of Lloyds Bank, Pitman presided over a remarkable period of growth, wherein the bank’s overall market capitalization increased from £1 billion in 1983 to more than £20 billion in 1996. Pitman’s emphasis on shareholder value as the bank’s primary objective, and his strict focus on the retail banking sector, were considered instrumental to this success.

Pitman’s philosophy quickly paid off for Lloyds TSB, and by mid-1997 the group was poised for another merger, with a surplus of more than £1 billion to spend. The banking climate was beginning to change in England, however. Regulators, already wary of a lack of competition in the British banking industry, were resistant to further domestic mergers among the nation’s top banks. Although the prospect of an international merger was appealing to shareholders, the relative inexperience of Lloyds TSB, and British banks in general, in foreign financial service markets made it difficult to find a suitable overseas partner.

At the same time, it was becoming clear that overseas expansion was unavoidable in the early years of the new millennium. Fiscal 2002 witnessed a steep decline in Britain’s high-end financial service market, as a number of customers, many of them young professionals, began moving their accounts abroad. Lloyds TSB was hit particularly hard by this trend, and its market share dropped from 17 percent in 2001 to 12 percent in 2002. The challenge for Lloyds TSB clearly lay in adapting its services to cater to a new generation of wealthy clientele and in finding a way to gain a foothold in the international banking market. Heading into the new century, a significant overseas merger seemed especially critical.

Principal Subsidiaries

Lloyds TSB Bank plc; Cheltenham & Gloucester plc; Lloyds Bank (BLSA) Limited; Lloyds TSB Commercial Finance Limited; Lloyds TSB Leasing Limited; Lloyds TSB Private Banking Limited; The Agricultural Mortgage Corporation PLC; The National Bank of New Zealand Limited; Lloyds TSB Bank (Jersey) Limited; Lloyds TSB Scotland plc; Lloyds TSB General Insurance Limited; Scottish Widows Investment Partnership Group Limited; Abbey Life Assurance Company Limited; Lloyds TSB Insurance Services Limited; Lloyds TSB Life Assurance Company Limited; Lloyds TSB Asset Finance Division Limited; Black Horse Limited; Scottish Widows plc; Scottish Widows Annuities Limited.