Daniels' dream on a knife edge as EU-led break-up of Lloyds looms

Published on Wednesday 16 September 2009 21:41

A YEAR to the day after the terms of the takeover of HBOS by Lloyds TSB were announced, Lloyds chief executive Eric Daniels is battling with the European Commission to maintain his dream of dominating the UK retail banking market.

Analysts yesterday predicted the EC's demands will be a "final insult" to long-suffering investors, many of whom have voiced outrage over Lloyds' decision to take over the faltering Scottish bank. Daniels' job is thought to be on the line if he is forced to sell Halifax as a condition of receiving state aid.

There has been speculation that new entrants such as Tesco Personal Finance, led by Benny Higgins, or Virgin Money may be interested in any branches that come on to the market.

Lloyds and the Royal Bank of Scotland have been in "intensive" negotiations with the Treasury and the EC regarding the terms of their access to the asset-protection scheme, the government's bank insurance programme.

EC competitions commissioner Neelie Kroes has rejected previous Lloyds' proposals, likely to involve the sale of its Cheltenham & Gloucester branches. Earlier this year, Lloyds identified 260 billion worth of toxic assets for the government insurance scheme, but Daniels wants to cut the 15.6bn cost of joining the scheme.

But Nic Clarke, banking analyst with Charles Stanley, predicts the EC's demands will only infuriate shareholders further: "Given all the pain that the Lloyds shareholders have suffered it will be the final insult.

"They wouldn't get that money back. The whole deal was justified on the back of synergies that could be made."

Although the EC has distanced itself from reports it has demanded Halifax as a sacrifice, it is thought Lloyds will aim for a compromise with Brussels, selling off some of the Halifax branches but retaining the name.

The EC has also denied reports that the negotiations will be rushed to complete ahead of its change of term next month, when Kroes is due to leave her post. Observers estimate talks on any bank sells-offs required by the EC may drag into spring, in time for the UK elections. .

As the talks continue, MSPs on Holyrood's economy committee yesterday launched an inquiry into the future of Scotland's financial sector.

Adrian Coles, director general of the Building Societies Association, told MSPs that some banks, including Lloyds, were now "too big to fail" warning this could lead to another banking collapse. "We're dominated by three large institutions that can never fail – and then you have to ask whether the seeds of the next crisis are already being built," said Coles.

Owen Kelly, chief executive of Scottish Financial Enterprise, rejected claims that banks are "back to normal" after the state bailout. "The industry has been humbled by what's happened," he told the committee.

"Our banking industry has faced some unprecedented challenges and people are working to come to terms with that."

RBS was bailed out with about 95bn of government money and is now in majority public ownership.

HBOS was only saved after a bailout to the tune of billions and a merger with Lloyds TSB.

Former Labour leader Wendy Alexander asked Kelly why references to the bailouts of RBS and HBOS were absent in its submission to the committee.

The 11bn received by HBOS alone was "almost the entire budget of the NHS in Scotland in one year", she said. "Your largest and second-largest members have been the recipients of three times the entire budget of the Scottish Government in one year," she told Kelly.

"And you produce a three-page submission that has nothing to say about why Scottish-based institutions are uniquely in the position of having direct shareholding of government of that scale.

"I just think people will find that simply quite fantastical."