Terry Murden: With banks breaking up, here's an idea worth floating

Published on Monday 2 November 2009 21:06

TODAY will mark another milestone in British banking, with the expectation of a record rights issue from Lloyds Banking Group and the terms by which it, and possibly Royal Bank of Scotland, will be reshaped.

European competition commissioner Neelie Kroes' work is almost done and she will be remembered for bringing either sanity or unnecessary dislocation to the sector, depending on how history interprets the revolution to come.

It has been a messy affair that will result in scaled-down banks either brought to heel or else unfairly compromised in their ability to compete with the European giants that have escaped the rout.

As stated in this column last week, Santander is one such bank that can go on growing with impunity, as it has received no state aid. With operations in Spain, the UK, Brazil, Mexico and Far East, it is achieving the sort of growth Sir Fred Goodwin plotted for RBS.

Now the Scottish bank will be much diminished by Kroes' cutbacks. Chief executive Stephen Hester was already planning a 40 per cent reduction in its balance sheet and yesterday announced a further 3,700 job losses in the branch network. But the sale of the insurance businesses and the branches in England and Wales, and a sharp reduction in business and investment banking, has proved harsher than it had expected. Hester is said to be disappointed with the outcome, but he will have no right of appeal.

Lloyds should provide details of a 13.5 billion rights issue that will be the biggest in history and will cost the UK taxpayer a further 5bn. It, too, faces the loss of assets, including the online bank Intelligent Finance and 185 Lloyds TSB Scotland branches.

A reference in this column last week to Lloyds' plan to switch customers from these branches into the Bank of Scotland (which it acquired through the HBOS takeover) has been brought to the attention of the Treasury and European Commission officials who are deciding the bank's fate.

They were said to be concerned at what was described as a plan to "hollow out" Lloyds TSB Scotland before it is sold.

The government wants Lloyds to sell TSB in Scotland and there are moves within Scottish business circles to ensure it does not fall into the hands of one of the other potential bidders, who include Tesco, Virgin and National Australia Bank. This is a tough ask, but it is also a chance for the Scottish power brokers to achieve their goal of building an independent Scottish bank.

They could not get their hands on Bank of Scotland, and it appears Eric Daniels, the Lloyds boss, has managed to hold on to it, knowing it is a bigger business and stronger brand north of the Border.

None of these disposals will take place for three or four years. On the upside, there is some semblance of continuity, but on the other hand, a great deal of uncertainty.

While there are said to be buyers waiting in the wings, there is no guarantee they'll come forward. Tesco Bank boss Benny Higgins last week effectively ruled out a bid for Northern Rock's "good bank", while Virgin president Sir Richard Branson has never knowingly overpaid, so he will strike a hard bargain for anything he gets.

One other option would be to float these business, particularly the insurance division of RBS. It employs 18,000 in its Direct Line and Churchill operations, and a listing would provide a smooth and guaranteed sale process, while allowing the taxpayer to get some of their money back. If the Scottish politicians are looking for a positive outcome, how about pushing for this option and the relocation of the business to Scotland?

British Airways

BRITISH Airways boss Willie Walsh won't be looking forward to Christmas. A probable strike will disrupt tens of thousands of passengers unless the company and the trade union can come up with a compromise that will restore peace.

With the company heading for record half-year losses, its problems were exacerbated by news from Ryanair boss Michael O'Leary, who cheerily announced a sharp increase in profits at its budget rival. Lufthansa now seems to be rethinking the sale of Bmi, also loss-making, indicating the gulf that is opening with the no-frills airlines.

One worry is that BA and Bmi – rumoured as merger partners – may end up reducing their Scottish services as they seek to cut costs.