The Giant of Banking

THE CITY WORSHIPS SIR BRIAN PITMAN, THE BOSS OF LLOYDS TSB. WHY?

Sir Brian Pitman, chairman of Lloyds TSB, sits in his wood-panelled office, where even the original Lino is Grade One listed, and gazes at the sumptuous view of the Bank of England. As head of Britain's biggest and most profitable high street bank, this is the man who is, to many, the country's most successful living banker. For generations, British high street banks have been notorious for taking people's money and blowing it on the next fad. In the 1970s, the UK banks lost billions on third world debt. In the 1980s it was property development. In the early 1990s, small-business lending. But Sir Brian has changed that. He has shown banks are not destined to repeat the mistakes of the past, but can be as profitable as the best-run global corporations.

It is 15 years since he took charge of Lloyds, first as chief executive and since 1997 as chairman, turning what was Britain's smallest "big four" clearing bank into one of the world's largest and most profitable institutions. His public appearances are, in the words of one observer, "an opportunity to worship at the feet of the great Sir Brian". To the City, he can do no wrong. Investment bankers and management consultants hang on his every word.

Yet this view of 67-year-old Sir Brian as the most successful banker of his generation has come relatively late in his career. Had it not all come so spectacularly right in the past five years, Lloyds would probably be remembered first and foremost for having come badly unstuck in Latin America in the 1980s. And Sir Brian's reputation would be overshadowed for his involvement in the decisions that led in 1989 to the group writing off more than pounds 1.7bn of Third World debt, resulting in a loss before tax of pounds 715m.

Sir Brian does not shirk responsibility for the blacker chapters of the bank's recent history. "I was involved in all these things," he says. "It is a sad indictment of human nature that you have to hit bottom before you learn.You learn as much from your mistakes as you do from acting correctly. I was also able to see the mistakes made by others and learn from them. You learn as much from a bad manager as you do from a good one."

The deal that really made his reputation is unarguably Lloyd's 1995 merger with the TSB, now seen as the textbook example of a retail banking deal that has inspired banking consolidation worldwide.

Sir Brian wears his greatness lightly. Not for him the chauffeur-driven limousine. He hates being driven and prefers when possible to come in as he has always done, on the 6.30 commuter train from Weybridge. He radiates what Americans call old-world charm. But he is also fiercely competitive. For years he was rarely beaten in the annual executive golf tournament for senior staff. And there is a ruthless streak, too. One investment banker says: "He is a megalomaniac, but when you look at what he has achieved, he is entitled to be."

He is incredibly tall, and that colossal stature alone can be intimidating. Even Peter Ellwood, his capable chief executive, looks scared of him. A colleague tells how Sir Brian once made a show of nodding off during a presentation by a high-powered management consultant, only to leap up when the hapless speaker finished and ask a penetrating question which left the "expert" floored. He demands a lot of himself, and sets similar standards for those around him. Not everyone makes the grade.

One who fell by the wayside was Andrew Longhurst, the talented chief executive of the Cheltenham & Gloucester building society. He was welcomed on the board when Lloyds took over the C&G in 1995 as a possible successor. He has now long since departed the group.

Sir Brian has his detractors, too. A story is told, no doubt apocryphal, of an outburst from the former chairman of HSBC, Sir William Purves, who harumphed disparagingly, "That mortgage banker", after someone was heard lauding Sir Brian to the skies. Others accuse him of being the Hanson of the banking industry, buying up assets on the cheap, jettisoning anything that requires expensive investment and making prodigious use of acquisition accounting to flatter profits. Senior executives at HSBC have been heard to mutter that their bank would not tolerate many of the things happily waved through at Lloyds. Others point out that having sacrificed its international operations on the altar of efficiency, Lloyds is too UK-centric and poorly equipped to play a real role in the global consolidation of banking.

Lloyds' rivalry with HSBC goes deep. Today Sir Brian is regarded as the consummate deal-maker. That was not always the case. Those with longer memories recall 1986, when still fresh into the job, he launched an unsuccessful bid for Standard Chartered to challenge HSBC on its Asian home turf. "We identified the Far East as a good place to expand and Standard Chartered had a very good franchise," he says. " The mistake we made was to try to get it too cheaply." Then in 1992, Lloyds sought to thwart HSBC's takeover of Midland Bank by launching its own bid only to be blocked by Michael Heseltine, then President of the Board of Trade, on competition grounds. "If we pursued the bid it would have been unacceptable to the authorities," he says.

Sir Brian is not a man who likes to lose. He took away two important lessons from those early failures. Lesson one: "If an acquisition is to succeed there must be something in it for both sides, not just financially but also for the people." Lesson two: "A merger is lost or won after the deal is done." Those early failures have made Sir Brian cautious in the extreme. Every deal is rigorously researched to see if it really would add something to the business. Increasingly, the deals come to him. The rigorous approach paid off big when Lloyds took over the Cheltenham & Gloucester in 1995. "Like many of the banks, we wanted to expand our mortgage business. We did the research and asked, `If you are going to take out a mortgage who would you go to'. No-one said a bank. Among mortgage lenders C&G was in the top 10."

Not only was Lloyds able to buy the C&G at what, by the standards of later deals in the sector, was a very cheap price, it also had the pick of the bunch. C&G, says Sir Brian, was light years ahead of its rivals in the application of new technologies, including total image processing, to the mortgage business and in standards of customer service.

To the annoyance of competitors such as Barclays and NatWest which still struggle with cost bases that are massively bloated in comparison, the C&G deal transformed the cost structure of Lloyds at a stroke. Mike Fairey, Lloyds' deputy chief executive, says: "He was one of the first to talk of over-manning in the UK financial services sector and the need for consolidation. He recognised the imperfection of Lloyds Bank earlier than most. He looked at the market in longer terms and felt he had to have scale."

Sir Brian has given his life to Lloyds and it has repaid him handsomely. He is listed as 880th in The Sunday Times league table of Britain's richest people, an exceptional achievement for someone who started with little and has never been in business on his own account. But the background of the man who was was knighted in 1994 is not privileged. His father died in a car crash in 1931 when he was nine weeks old, leaving his mother, Doris, to bring him up in the West Country town of Cheltenham. Tough as it must have been for her, Sir Brian says he remembers very little in the way of real hardship. "It was a very happy environment," he says. "I was blessed with a very loving mother. It is not money that matters in life. I had what matters most in life." Doris Pitman died a few years ago at 84.

He believes growing up without a father taught him self-reliance. In the Pitman household, there were still men's jobs to do, and the young Brian did them as best he could. He was fortunate to land a scholarship at the local grammar school. In those days, scholarship boys wanted for nothing. Everything from meals to sports kit were free. Here he discovered his passion for cricket, and the lessons he learnt on the playing field have stayed with him. "I've always felt sport plays a very important part in management," he says. "A team of average people pulling together will always beat a team of prima donnas pulling apart. Being in a team pays off later in life - you are used to winning and losing." Fortunately, his interest in sport is shared with his wife Barbara, a keen golfer.

He was a normal teenager and the idea of going into banking could not have been further from his mind. At 15, the only other major interest in his life apart from cricket and playing the trombone was, he says, the female sex. One of his two best friends became a professional cricketer, the other a musician. Either choice would have appealed to him but fate had other ideas. "The headmaster told my mother I should have gone to university. I felt I had been enough of a burden on my mother."

He applied for a job advert in the Daily Telegraph and went to work in the local branch of Lloyds Bank. His talent was noticed and promotion swiftly followed. After stints in Brussels and in Paris, where he went to evening lectures at the Sorbonne when he was not sampling the charms of cafe life, he returned to a succession of jobs in Lloyds' UK banking empire before settling more or less permanently in group head office at the heart of the City of London.

In the early 1970s, as head of Lloyds' City branch in Threadneedle Street, Sir Brian wrote the cheques for the great corporate raiders, including Jim Slater and the late Sir James Goldsmith. "I met all of those characters," he says. "It was an exciting time, and a part of that rubbed off on me." When the over-exuberance of that period was followed by the secondary banking collapse in 1973, Sir Brian found himself in the thick it. Dealing on Lloyds' behalf with Sir Gordon Richardson, then governor of the Bank of England, that Christmas Eve he helped draft guidelines for the rescue which stopped the fringe bank crisis bringing down the whole financial system.

The experience was to come in handy. In 1982 he represented Lloyds as one of the most heavily exposed banks at the Ottawa summit when the decision by Mexico to default on its international debt threatened to bring the world's banking system to its knees. He remembers distinctly the horror when he flew back to tell the Lloyds board that, far from turning off the tap, they should back the salvage plan of Paul Volcker, US Federal Reserve chairman, and keep Mexico afloat. Sir Brian, as deputy chief executive of Lloyds International in the 1970s, had approved many of the loans that caused Lloyds so much grief. He still believes the Volcker bail-out was right. "Nearly every country in Latin America is now a democracy. We have learnt high inflation does nobody any good."

With hindsight, the folly of Lloyds' headlong plunge into Latin America seems obvious. But that was not how it seemed at the time. "People used to have a thing about balance," he says. "It was thought a bank needed to spread its risk, which meant having international operations to balance the domestic ones, spreading your loan portfolio far and wide."

In 1984 with the bank still some way from having fully dealt with all its Latin American problems, he became chief executive. Top executives were summoned to a brainstorming session. Sir Brian says: "We asked ourselves, `How do you define success?' Some people thought that was being the biggest. Then someone pointed out the two Scottish banks were small but more successful in profits' terms. We concluded the best test was return on owners' capital and decided to be world-class in value creation."

Sir Brian went to the United States to learn how corporations such as Kellogg, Coca-Cola and Disney measured performance. All used return on equity as their goal. Sir Brian adopted the notion of economic profit - which is what is left when the cost of capital is deducted - as a yardstick for performance-related pay. If Coca Cola could double its profits every three years so could Lloyds.

For the second time in his career he returned from North America with an unpalatable message for the board. "The companies best at value creation were also best at customer satisfaction, and attracted the best people. Clearly it was a virtuous circle." The board protested: "How could you compare banking with soft drinks manufacturing?" But they swallowed it. Sir Brian says: "It was the turning point of the company. It changed the level of ambition of the bank.

"When we decided we would have a single objective, we started to focus people's attention. It kept us out of a lot of trouble." What followed was a state of permanent revolution. Businesses were put under the microscope and those which did not add value were sold or closed.

Senior executives would come in for regular weekend sessions and be asked to think the unthinkable, then on Monday morning be asked to implement it. "One weekend we had a look at what someone would do to us if they took us over and then we did it ourselves," he says.

Now, when Europe is on the brink of cross-border consolidation, rivals in the UK are still struggling with basic issues of cost structure and management. Lloyds is free to do the right deal, when Sir Brian judges it has come along. The talk in the City is that Sir Brian wants one more transforming deal then he will bow out, though not everyone is convinced. One banker who knows him well said: "They will have to carry him out in a box."

Over 18 months, Lloyds has looked at deals in France, Spain, Australia and the US. Sir Brian seems conscious Lloyds is in many respects the flagship of UK banking hopes in a sector fast consolidating internationally. But he has said publicly he believes consolidation in the UK has further to go and he intends Lloyds to be part of it.

One suspects he enjoys keeping people guessing. "It worries me that the best sportsmen go to America," he says. "We don't finance films. We have the best actors, directors but nearly all the money is in the US. If you create value there is money to invest. The Internet is growing fastest in the US because people have the money to lose on Internet stocks.

"The reason for America's success is value creation. If you create value it becomes a virtuous circle. You can attract the best people and put more back into the community. And Britain is on the up once again. It is really good to feel you are among the winners."