October 2002 – December 2004
Abbey National Plc. (London)
Chief Executive Officer
In October 2002 Arnold took a call from Jan Hall asking if he would meet with Lord (Terry) Burns, the recently appointed Chair of Abbey National.
Arnold remembers his research ahead of the meeting;
“The website had about ten different logos representing the different businesses in the group, which gave a clear indication of the lack of any focused strategy. I liked Terry, was attracted by the chance to do something serious in Britain with a British firm and thought the challenge interesting. I started work within weeks of meeting Terry. In fact, Abbey’s situation was direr than any of us realised and as with many projects in life one would not take them on if one understood ex ante the difficulties. Equally, such opportunities often turn out to be the best experiences of one’s life”.
“This was the start of the best collaboration experience of my career working with Terry and Stephen Hester. Other members of our management team comprised Priscilla Vacassin, Yasmin Jetha, Mark Pain, Angus Porter and Tony Wyatt. Abbey had pursued a management consultant approved strategy to become the fifth largest financial services firm by 2005. This resulted in an indiscriminate use of the balance sheet to get profits. It also meant that there was zero apparent focus on the core retail franchise, which was underinvested in every sense”.
Arnold describes the strategy they followed;
“Stage one was crisis management led by Stephen with Nathan Bostock’s support to protect value as much as possible. Abbey had become the best client of the investment banks and had accumulated a £60 million wholesale portfolio covering everything from overlarge bond positions to CDOs and aircraft leases. As this portfolio was being rigorously managed down it also became necessary to cover the unhedged equity exposure in the life insurance companies at a time that the market in early 2003 was weak. The final risk element was settlement over an extended period of regulatory risks, mis-selling, KYC, complaints handling and negotiations with the FSA on the new realistic balance sheet rules of life companies”.
Arnold recruited PIMCO to help with the modelling of the portfolio risks, management of part of the portfolio and assistance in selling large pieces of the illiquid and structured assets.
Throughout each and every stage, Arnold and the team pursued a communications strategy based on consistent and transparent reporting internally and to all stakeholders; shareholders, regulators, rating agencies, media, customers and staff.
“Stage two of the strategy was to achieve value and return Abbey to its roots as a successful and innovative retail bank. All retail banks were pursuing similar strategies based on aggressive selling and there was little room for Abbey to compete unless it adopted a radical and differentiated strategy. A positive factor was the mutual DNA that had survived since Abbey’s building society days, which meant that the branch staff were still minded to serve customers in a human way. And as in all institutions there were numerous talented individuals who rose to the challenge”.
Together the management team overhauled the management, implemented new recruitment, training and retention policies; redesigned the products, pricing, service, brand proposition and customer communications, including rewriting standard letters in plain English; began optimization of the branch network; re-branded to ‘Abbey’ to signal fundamental change, appeal to consumers and to become a distinctive brand once more.
On the operational side, Arnold says;
“We consolidated operations and call centres into five major hubs; rolled out bank-wide CRM and IP telephony systems; closed Scottish Mutual and Scottish Provident to new business; restructured the underperforming asset management business through a barbell approach, increasing allocation to passive management, which was outsourced and allocating the balance to a multi-manager strategy under the leadership of James Bevan”.
The final stage in the strategy is described by Arnold;
“The final stage was to extract value through investing in the core business; divesting assets from the wholesale portfolio and non-core businesses in the ring-fenced ‘for sale’ unit; negotiating the sale of Abbey with US, UK and Spanish bidders and UK/EU regulators and competition authorities. When the bank looked safe and the transformation had begun we were then visited by Emilio Botin and Juan Inciarte who moved with great determination, outclassing the US and UK banks that approached us around the same time”.
The sale of Abbey to Santander in a deal with no regulatory or competition risk represented the final value realisation. The price represented over a 100% increase from the low 19 months earlier when the true financial position of Abbey National had been established and disclosed to shareholders. This was the largest European cross-border financial services deal and was executed contemporaneously with the London listing of Santander, which succeeded in retaining over one million Abbey shareholders.
Arnold talks about the sale;
“The sale meant that our vision of creating a highly differentiated, genuinely customer-friendly bank could not be realised. However, it was always going to be tough in a market where our major competitor, Halifax, and others were pursuing a pure product sales strategy. This was the right deal for shareholders and staff since Santander had the resources and technology that Abbey could not afford. On my side I had enjoyed doing something in Britain, learning more about retail banking and visiting countless branches across the UK”.
The whole exercise took 2 years and 1 month leaving Arnold very unexpectedly out of regular employment for the third time in his career although he stayed on with Santander.