Royal Bank reaps billions as investors raise prospect of rival bids for HBOS

Published on Saturday 20 September 2008 14:54

ROYAL Bank of Scotland has sucked in "several billions" from nervous investors as new bidders threaten to gatecrash the £12bn merger between HBOS and Lloyds TSB.

RBS is understood to have been a huge beneficiary of the continuing turmoil in the sector with HBOS customers among those to have joined what one banking source described as "a flight to quality".

Corporate and retail investors have switched savings and other investments to those institutions seen to offer greater security.

Worldwide panic caused by last week's extraordinary fluctuations on stock markets forced HBOS and Lloyds TSB into a hurried merger, but this weekend there are indications that some leading shareholders want to see other bidders emerge.

Scotland on Sunday has learned that Bank of America and Citigroup, along with Spanish bank BBVA, could be tempted to mount counterbids due to discontent over the deal.

One source said: "There is a general feeling that Lloyds is getting too much of a bargain. With the markets coming back strongly on Friday there is every chance that values will rise and HBOS will be seen as a giveaway."

Another said: "I don't feel much better about the near-term risks that face the combined group. If anything, the apparent vulnerability of the group to a wholesale funding drought appears higher. This has to be the biggest issue for now, and is not one that is in the control of the management."

The offer of 0.83 of a Lloyds TSB share for every one HBOS share valued the latter at 232p at the close on Wednesday. But that preceded the biggest-ever one-day rise in the FTSE-100 as markets responded positively to news from the US of emergency intervention on toxic debts. At Friday's close the offer valued each HBOS share at 237p. They closed at 222.5p having touched 263p.

Shareholders are particularly angry that if the deal had been done before last weekend they may have got more than 300p per share. Those who took up the rights issue at 275p per share are said to be particularly aggrieved.

Bank of America – which has just mopped up Merrill Lynch – and Citigroup would both covet the retail banking business in the UK that HBOS could offer. Citigroup only has egg, the internet bank.

HSBC was approached about acquiring HBOS but Lloyds TSB stepped in when the potential competition obstacle was lifted. It is understood that HSBC has again ruled itself out of a bid.

One big concern for shareholders is the newly combined group's 163% loan-to-deposit ratio. It means that for every 1 of lending, it has 37p in deposits. That compares with a ratio of 127% at RBS, or 73p covering every 1 on loan.

While this leaves Lloyds TSB and HBOS vulnerable, RBS will see huge benefits from attracting deposits from fund manager, corporates and ordinary savers. Several billion in extra funds from depositors is a small but significant contribution to its total deposits of 440bn as it reduces the need to seek funds from the difficult wholesale money markets. HBOS has 258bn on deposit.

Amid speculation over the merger, questions continue to be asked about why neither camp confirmed the talks to the market for several hours while the shares slumped. Calls have been made for an inquiry into possible market abuse.

Lloyds TSB management are this weekend hammering out further details of the merger. Scotland on Sunday has learned that:

&#149 Both banks deny any wrongdoing in issuing announcements to the market. A source involved in the talks said: "You never do. You carry on the talks until you come to a deal."

&#149 The name will not be Lloyds-Halifax despite rumours to the contrary.

&#149 No decision has been made on job losses as the banks "have not worked out how the synergies will be achieved".

&#149 Alistair Darling, the Chancellor, apparently only met Sir Victor Blank, the Lloyds TSB chairman, after the press release was drafted and he had no hand in insisting that there was a sentence referring to the protection of Scottish jobs.

&#149 Andy Hornby, chief executive of HBOS, will almost certainly join the combined board. His new role was described as "work in progress".

&#149 Archie Kane, chief executive of Lloyds-owned Scottish Widows, will meet First Minister Alex Salmond on Tuesday to discuss jobs and the role of Scotland in the new group.