Scottish Agenda: HBOS pays price for short-term thinking

By Ian Fraser

The Sunday Times

August 12th, 2007

Benny Higgins; image courtesy of Times Online

When Benny Higgins announced that he was defecting from the Royal Bank of Scotland to HBOS in January 2006, one analyst said: “It’s a bit like a player transferring from Rangers to Celtic. It just doesn’t happen.”

In some ways the two leading Scottish banks are like the Old Firm. The Bank of Scotland, having bankrolled Scottish Jacobites before the 1745 rebellion, and RBS, which was effectively founded by the Whigs to reduce and undermine the Bank of Scotland’s early impact, have more or less been at each other’s throats ever since.

For a senior executive such as Higgins to move between the two would until recently have been virtually unheard of.

But presumably without much thought for these historical niceties, Higgins — a colourful character who last year made the front page of the Scottish Sun under the headline “The bonk manager” — did make the move. In July 2006 he took over from Andy Hornby (who was replacing James Crosby as HBOS’s chief executive) as head of HBOS’s retail arm.

Perhaps more surprisingly, just over a year into his new job, it was announced on Friday that Higgins is throwing in the towel.

The talk in the City after Friday’s announcement was that Higgins had been made to “carry the can” for HBOS’s recent abysmal performance in retail banking. Last week, the Edinburgh-based lender announced that underlying first-half profits at its retail arm had fallen 8% to £1 billion.

The bank also admitted that a new pricing strategy in the fiercely competitive UK mortgage market (described as a “viper’s nest” by Higgins’s ex-boss Gordon Pell) had gone seriously awry. HBOS, which has consistently had a 20% to 30% share of the UK new-mortgages market, said this had plummeted to just 8% in the first half, against 21% in the same period the year before.

Hornby has been seeking to persuade journalists that the bank’s humiliating loss of face in the UK retail market and Higgins’ departure — the announcement of which came alongside news the retail division is being split in two — were unconnected. He said: “It’s about structure, not performance.”

I’m not so sure about that. However, I do not subscribe to the view that Higgins was pushed. Rather I believe he may have recognised that the problems at HBOS’s retail arm were deeper-seated than he thought when he was persuaded to make his historic transfer, and perhaps he decided he did not want to be tarnished by further association.

Could it be that the chickens are beginning to come home to roost from the retail strategy put in place on Crosby’s watch in 2004-5?

Some have argued that this was effectively a “growth-at-any-cost” strategy, designed to give a short-term boost to the numbers and directors’ pay, but lacking any long-term logic.

Whether or not this is the case, there can be no doubt that Jo Dawson, currently HBOS’s head of insurance, and Dan Watkins, currently the group’s risk director, who are due to pick up the pieces when Higgins leaves later this year, have their work cut out.

In Scotland many former customers of the Bank of Scotland are aghast that branches have been made to resemble cheap and cheerful grocers’ stores. This is also something that Dawson and Watkins may wish to address.

S&N’s core values

After mixed results last week, what is Scottish & Newcastle’s response to the rapid decline in the UK beer market? Plant more apple trees.

The brewer wants to plant a further 1,200 acres of apple orchards over the next three years, which translates into a phenomenal 300,000 apple trees.

This is over and above the 2,500 acres of S&N-owned farmland already being devoted to the forbidden fruit, and fully 6,300 acres of land in Herefordshire and surrounding counties over which the brewer’s Hereford-based Bulmers subsidiary has long-term contracts. Overall S&N either owns or has under 30-year contract, 2 million trees on some 10,000 acres.

With the UK beer market in sharp decline — it has fallen by about 7% over the past year — S&N clearly believes cthat ider is the future.

This is partly thanks to the success that C&C Group, the Irish owners of Magners, has had in persuading younger consumers that cider is a fashionable drink — as long as it is drunk over ice.

S&N has made a good show of gatecrashing the party with its Woodpecker, Strongbow and Jacques brands. The biggest risk is that cider’s current success turns out to be a short-term fad. Then what will S&N do with all those apples?

Tesco trust test

James Barnes, the well-spoken chief executive of Dobbies Garden Centres, has convinced himself it is better to fall into the arms of Sir Terry Leahy’s Tesco than either Sir Tom Hunter’s West Coast Capital or private equity house Apax Partners.

On Friday he told me: “The colour of their [WCC and Apax’s] money was far less enticing than the £15 a share we were offered Tesco.

“I’m not aware of any other retailer being taken over with that sort of exit multiple [Tesco offered 17.7 times 2006 earnings for Dobbies] in the past three decades.”

He added that he had “no reservations” about selling the business to Tesco.

Barnes seems particularly taken by promises made in the Tesco offer document to keep the head office near Dalkeith and to maintain the Dobbies brand and ethos.

Barnes ought to be aware that, a few years down the line, these promises may not be worth the paper they are printed on.

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