Lloyds: The biggest loser

Published on Thursday 14 April 2011 17:26

A cloud hangs over Lloyds after ICB's call for further branch closures

AS SIR John Vickers walked through the doors of Victoria House in Holborn, the venue for many high-profile tribunals, he would have been forgiven if, for a brief moment, he also felt on trial.

The room where he would present the findings of the Independent Commission on Banking's long-awaited report early on Monday morning was filled to capacity with reporters, banking representatives and television crews, all watching his every move.

With the constant flash of cameras and the bombardment of questions, it would have been easy for Vickers to lose his composure as he slowly and methodically talked through his analysis of the UK's banking market.

But even when he was accused of "bottling it" on some of the more contentious areas of reform, the former Bank of England chief economist, who chaired the five-strong commission, maintained his sang-froid, arguing that the ICB's package of measures would "enormously reduce the chances of calling on the taxpayer for support" in future.

But across town at Lloyds Banking Group's headquarters on Gresham Street, a stone's throw from St Paul's Cathedral, the atmosphere was far from calm.

While many of his peers at rival banks were heaving a sigh of relief on Monday at the ICB's better-than-feared recommendations on banking structures, new Lloyds chief Antnio Horta-Osrio was feeling the heat as his firm was the only one to be singled out by the weighty report.

The worst fears of Lloyds' senior management were realised as the commission recommended a "substantially enhanced" sale of branches, going beyond the 600 outlets it is being forced to offload by the European Commission. Horta-Osrio could barely mask his frustration, declaring that the ICB's recommendation appeared to be based on "limited evidence and could paradoxically delay a new competitor coming into the UK market".

Although Lloyds' shares, like most other bank stocks, closed up on Monday afternoon, the City's scribblers went home that evening with a feeling that Horta-Osrio's bank had been the main victim of the ICB's efforts to bring the Square Mile into line.

"It really is an uncertainty Lloyds could do without," said Charles Stanley banks analyst Nic Clarke. "Substantially enhanced - what does that mean?"

Joe Dickerson, analyst at Espirito Santo, said he was "very surprised" at the further suggested crackdown on the Lloyds branch network.

"Lloyds shouldn't have to dispose of anything above the 600 branches. The commission has used the metrics of branch concentration and gross market share, and I just don't think increasing the branch disposals, whether it be by an extra 100 or 400, makes the banking market more competitive at all," he said.

Analysts estimate Lloyds could be forced to sell anywhere between 200 and 400 extra branches. But fears are already growing over what position a "substantially enhanced" sell-off would leave Lloyds in.

Morgan Stanley has calculated that if the bank has to eventually dispose of 1,000 outlets, it would reduce its pre-tax profit by 17 per cent by 2013.

Rating agency Moody's has also warned that any further divestments beyond the 600 already required by the EC could be "negative for Lloyds' standalone financial strength".

Horta-Osrio and other senior executives at the group are already gathering evidence to try to change the commission's mind. Since he took over from Eric Daniels last month, the Portuguese banker has made little secret of his desire to offload the 600 branches as quickly as possible. The ICB's report has added an extra urgency to his desire for a rapid sale by the end of the year.

But the City believes he may now have to wait longer than expected. Chancellor George Osborne, who will have the final say over which ICB recommendations, if any, are implemented after the commission's final report in September, is believed to sympathise with Vickers' findings on market competition. Osborne was set to tell Lloyds that it would be in the bank's "enlightened self-interest" to comply with the ICB's suggestions, according to reports.

Analysts also point to comments made in the aftermath of the ICB's interim report by Lord Levene, who last year set up a vehicle with fellow City grandee Sir David Walker to buy up branch networks and is the frontrunner to take the Lloyds assets.

Levene, who chairs NBNK Investments, warned that the ICB's remarks on Lloyds could potentially cause unhelpful delays to negotiations.

A substantial increase in the number of branches included in the package could even send parties who are already involved in discussions back to the drawing board, he cautioned. He told one newspaper: "Lloyds has been working very assiduously on this but if the structure of the disposal changes materially they may in effect have to start again."

Clarke, of Charles Stanley, warns that a package of 1,000 branches could exclude a number of potential bidders.

"It muddies the water," he says. "They might have to go back completely to the beginning. Because so many people are excluded - the big four banks for example - who is going to be able to take on 1,000 branches?"

However, it has emerged that another player with a big presence in Scotland may ride in if the Lloyds branch package is increased. There is strong speculation that puts Clydesdale Bank-owner National Australia Bank (NAB) in the frame as a potential bidder.

The City estimates that a successful swoop on a theoretical 1,000 branches would catapult NAB UK's market share from 3 per cent to about 13 per cent.

That would give it the same slice of the deposits and current accounts market as Santander of Spain, which hoovered up the branches businesses of Abbey, Alliance & Leicester and Bradford & Bingley.

It is believed NAB is interested in bulking up its UK business, which also includes Yorkshire Bank, with a view to potentially exiting the UK market. A bigger operation would give NAB move flexibility to float the UK business or even sell it off several years down the line, analysts suggest.

Dickerson, of Espirito Santo, said he gave credence to the scenario of NAB making a play for the Lloyds branches. Sources in Australia say it is looking at partnering up with NBNK Investments to make a potential bid.

Dickerson said: "Going for the Lloyds branches would be an easy way for NAB UK to get some scale quickly. It would make strategic sense provided they could finance the funding gap."

Keith Bowman, banking specialist at broker Hargreaves Lansdown, said NAB was "clearly going to be mulling over" a possible bid for the Lloyds branches. However, he added that it was not a clear-cut decision to bulk up Clydesdale and Yorkshire banks' coverage in the UK.

"Even though it has a strong foothold in the UK already, there will be a temptation to go for the branches," said Bowman. "The down side from NAB's perspective is that economic growth rates in the UK are seen as being lower than elsewhere in the world. That might put them off spending their money here."

Bowman argued that the City shouldn't yet rule out the chance that Horta-Osrio would be able to persuade Vickers and the rest of the commission to at least row back on the actual number of branches they want sold under a "substantially enhanced" divestment programme.

"Lloyds might be able to get some sort of concession on numbers in the consultations," noted Bowman. "The commission may have put its strongest case on the table now, but it may be privately willing to be negotiated back a bit. Some compromise on the hard numbers must remain a possibility."

A number of questions remain unanswered after the ICB's interim report, but analysts argue that the question marks over Lloyds' future will trigger the most uncertainty between now and September.

They suggest the ICB's findings will be a particularly bitter pill for original Lloyds TSB investors to swallow. They've had to stomach the emergency takeover of HBOS and all of the consequent restructuring and now the commission has added to the hurdles.

"We feel very sorry for the original Lloyds TSB investors," observes Clarke. "This could be a big slap in the face really."