Clean living and twinkly-eyed: The new TSB CEO is determined to change the face of banking

The MT Interview: Paul Pester, the chief executive of TSB, had a narrow escape - he nearly became head of the Co-op. But will he be so lucky when the relaunched and retail-friendly bank floats?

by Emma Haslett
Last Updated: 12 Mar 2015

Some CEOs pay lip service to transparency - TSB boss Paul Pester lives it. I know this because I've just narrowly avoided cracking my forehead on the glass door to his office. The whole room is enclosed by glass. It is less an office, more a fish tank. No chance here for a restorative nap after a boozy lunch - Pester can be scrutinised by his entire staff.

It isn't just the corner office that's made of glass, all the meeting rooms are. And the rest of the office, on one floor of a building a couple of doors down from Lloyds's headquarters on Gresham Street in the City, is aggressively open-plan. There isn't so much as a pillar or a screen to get in the way.

It's either revolutionary or a little oppressive. The first thing Pester says when I enter is: 'Have you been told about the transparency?' This is extreme metaphor.

Since 2011, Pester has been in charge of Project Verde, the cluster of 631 branches Lloyds is compelled to sell off under conditions set by the EU when it bailed out the lender in 2008. In September, the group was hived off from Lloyds, ready for an IPO in June.

It's clear from the start that Pester wants to do things differently. He isn't the usual dyed-in-the-wool banking executive. He completed a doctorate in mathematical physics at Oxford University and spent four years at McKinsey & Company before starting his career in finance at Virgin Money, where he was group chief executive for six years.

Then he led Abbey National's much-maligned takeover of Bradford & Bingley and Alliance & Leicester, before following Antonio Horta-Osorio to Lloyds in 2010.

Pester has been called the luckiest man in banking: if things had gone the other way, he would be chief executive of the Co-operative Bank by now. TSB - launched on the nation's high streets last September - was packaged up and ready to be sold to the Co-op. All he was waiting for was for it to sign on the dotted line.

'It genuinely shocked me when the Co-op pulled out,' he says. 'I was walking into Lloyds's head office and someone bumped into me - literally - and said: "Have you heard the news?" They'd just received the call, apparently. It was a complete shock.'

Not as much of a shock, mind, as when all those allegations about then Co-op chairman Paul Flowers came out last November, set out in glorious Technicolor by the Daily Mail. Flowers has since been arrested and charged with three counts of possession of illegal drugs.

What bothers Pester, though, is Flowers's performance in front of a Treasury select committee grilling two weeks earlier.

'Not being able to explain the size of the bank's balance sheet was a real surprise. The chairman should at least understand what value of loans they've extended to customers.'

During his days courting the Co-op, did he have the pleasure of Flowers's company?

'I have met him. I'd been to several Co-operative board meetings where they wanted to talk to me. They asked me to be the CEO of the combined Co-operative Bank and Verde bank.'

And was there anything to indicate Flowers was the party type?

There is a pause.

'Umm. Hmm.'

A longer pause.

'It was clear that he was unusual for a bank chairman in the experience that he had. So, yeah. That was unusual.'

To be honest, Pester is probably not the best person to ask. Along with Barclays' Antony Jenkins, he is one of the new generation of banking chiefs who are well pressed, clean living, twinkly-eyed and determinedly PR-friendly, not that the dry-as-dust Jenkins twinkles much.

'Diamond Bob' Diamond and Fred the Shred may have spent their free time chuffing away on cigars in dingy Belgravia clubs while their outfits fixed Libor rates, but Pester spends his evenings training for triathlons.

He grew up in Plymouth; his father was the coach of a local swimming team that included Sharron Davies, the Olympic silver medallist. Now, Pester goes swimming in London on a Thursday evening and trains on a Saturday with his team at the University of East Anglia near his family home in Norfolk, where he lives with his wife and two sons, both of whom are also studying maths. He throws in a bike ride or a 'long run' for good measure on a Sunday.

'More recently, in the past 15 years, I've been doing triathlons, as a way of having a bit of fun, really.' Blimey.

The impression he gives is more civil servant than bonus-grabbing banker: softly spoken with a slight west country lilt, he is wearing a navy suit and patterned tie (not a brash pinstripe in sight), and looks decidedly awkward when the photographer asks him to pose. Wolf of Wall Street, this ain't.

But it is that which Pester is most proud of. The TSB team spent two years - from 2011 to last year - trying to create a bank that customers would actually like. In the end, they did away with the concept of an investment bank altogether, deciding to focus on a purely retail offering. Which is why TSB markets itself as 'different': it won't use customers' deposits to make investments in funds no one quite understands, nor will it invest overseas. It's a return to the suddenly fashionable concept of old-fashioned banking.

'We'll use your savings to fund loans that will support economic growth in communities right across Britain,' he says.

The point, he says, is that this makes good business sense. The lesson of the past few years is that duping customers - by fixing rates or tricking them into buying unnecessary financial products - is pointless.

'In the five years to 2013, the top 10 banks paid out so much in compensation from mis-selling and various scandals that it's the equivalent of five years of dividend payments to their shareholders. So it was a false belief that profit was being generated. What they've really done has been paid back to the customer anyway: they were never proper earnings that they were making.'

He's equally animated on the subject of executive remuneration.

'I think we need to find a more balanced, more long-term way of rewarding our colleagues. I have some real personal views on how to do it. Having a short-term cash incentive can lead to the wrong actions ... by all sorts of senior execs. I'd like to see TSB try to make a bit of a difference in the way we reward our senior people, including me.'

He has the passion, but does Pester have the balls to run a publicly listed bank? He strikes me as rather a sensitive chap. Even battle-hardened Lloyds boss Horta-Osorio - who had run Santander and its predecessor, Abbey, since 2006 - was signed off in 2011 for a couple of months with stress. Running a national bank - retail or otherwise - is no walk in the park.

Admittedly, just by going through the process of listing, he is proving his mettle. One of the conditions of a public listing is that you have to provide three years of historical financials. Because TSB didn't exist until September, it has had to invent three years' worth of data.

It is working with PwC to comb through the records of every single customer who was taken over to TSB when the banks divided, going through their balances and the products they bought to work out what its balance sheet would have looked like. Then that data has to be audited. A single mistake throws everything off. It sounds agonising.

The real test, though, will be the bank's valuation of the shares. Pricing what is effectively a privatisation is a public relations minefield: too low and the bank will be in a Royal Mail scenario, accused of depriving the taxpayer of cash. Too high and it'll be 'elitist', which, given TSB's cuddly persona, is presumably a scenario Pester would rather avoid.

Then there's the situation Lloyds found itself in in March, when the government sold 7.8% of it at just 0.5p more than it sold its original tranche at. Investors weren't happy, and shares fell almost 5%.

Pester, of course, won't discuss this until June, when TSB's prospectus will be published. But he says investor interest - he has been to 16 meetings this week - is high.

'People understand our very simple retail banking model. It's very appealing to potential investors, because we're a very straightforward, predictable business.'

How long that stays true when TSB enters the mean world of public scrutiny is another question. Will Pester come out the other side with his squeaky-clean reputation intact? Hard to say. It's every banker for himself out there.

PESTER IN A MINUTE

1964: Born in Plymouth in January. He was educated at Manchester University and Oxford University, where he got his doctorate in mathematical physics

1988: Consultant at Scientific Generics

1993: Consultant at McKinsey & Company

1997: Director of corporate strategy, AMP

1999: Chief executive, Virgin Money

2005: Managing director, consumer banking, Lloyds TSB

2007: Chief executive, Moneyfacts

2008: Managing director, Santander UK

2010: Managing director, consumer banking, Lloyds Banking Group

2013: Chief executive, TSB

THREE CHALLENGES FACING PESTER

  • Price the bank at the right level for its IPO in the summer
  • Prove a retail-only model can be attractive to investors
  • Maintain TSB's squeaky-clean reputation.

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