Double blow as big guns turn against Lloyds-HBOS merger

Sir Donald Mackay, the chairman of the 1.4 billion Scottish Mortgage Trust, told The Scotsman that corporate functions for the entire superbank should be shifted north of the Border, while the Bank of Scotland should retain a separate legal presence.

He spoke out as JP Morgan analysts warned that the bid was not in the best interests of Lloyds TSB shareholders.

Meanwhile, Sir George Mathewson, former chief executive of Royal Bank of Scotland, told The Scotsman he thought HBOS might have survived if the US authorities and Britain's financial regulator had acted sooner.

Sir Donald, a former chairman of Scottish Enterprise, called on Lloyds TSB to recognise the separate legal presence of Bank of Scotland.

He wants to see Bank of Scotland plc reconstituted within the Lloyds TSB group, with its chairman and chief executive on the main group board. It would be responsible for retail and business banking in Scotland under its traditional name and iconography.

In addition, he would like it to oversee corporate functions across the UK and for the BOS investment arm, together with the 110 billion Scottish Widows investment portfolio, brought together and managed out of Edinburgh.

He said the deal had "dealt a massive psychological blow to Scotland" and, in its current form, meant a serious loss of bank competition in Scotland and threatened new ideas and innovation in the industry.

"Scores of people have spoken to me about it and voiced their concerns," he said. "They are horrified. The great feat of Bank of Scotland is that it has been an innovative bank. It led the introduction of electronic home banking. It has been innovative in its deal-making. And that record must be continued."

He warned "over-concentration of financial power in London" was "not a good thing, for the UK economy or for Scotland" and the deal presented "a serious risk of a diminution of competition".

Sir Donald is a respected figure in the financial community and his call for a recasting of the takeover will have strong resonance across the whole of the business community as well as within the Financial Services Industry Advisory Board and the First Minister's Council of Economic Advisers. If his plan gains support, it could make it tough for Lloyds TSB chief executive Eric Daniels and HBOS's Andy Hornby to persuade enough shareholders to cross the 75 per cent approval hurdle.

Yesterday, shares in Lloyds TSB fell a further 15p, or 5 per cent, to 260.15p, taking the fall since Monday to almost 9 per cent.

JP Morgan analyst Carla Antunes da Silva said the takeover was "not in the best interests of shareholders and creates a UK banking giant as we go into a significant UK economic downturn".

She said: "Looking ahead we would expect meaningful loan book contraction and significant revenue attrition outpacing cost synergies." She has slashed her earnings per share estimates for Lloyds TSB by 38 per cent and cut the forecast dividend pay-out ratio to zero. Her assessment of HBOS is even more devastating, with a forecast of a 46 per cent plunge in earnings next year and 53 per cent in 2010, with massive increases in bad and doubtful debt provisions.

She says it has one of the biggest deficits of the UK banks – 9.6 billion – despite the recent 4 billion capital increase.

Also yesterday, Societe Generale cut Lloyds' target price to 290p in the wake of its Friday share price issue.

"We are of the opinion that actions speak louder than words," said the analysts. "If Lloyds had been highly confident of the strength of its capital base, it should not have needed an equity injection."

The concerns were echoed elsewhere. Keith Bowman, of Hargreaves Lansdown, said although the share price drop was down to broadly the same factors affecting the wider market – concerns over the US bad bank proposals – there was "still some concern over the enlarged group's funding".

He said: "There are concerns there is still some reliance on the inter-bank markets and that although, on the surface of it, Lloyds appear to have got a bargain, it's a fine line between whether or not they can weather the short to medium-term difficulties."

Leigh Goodwin, of Fox Pitt-Kelton, said: "There are medium-term execution risks for Lloyds TSB in doing this."

Meanwhile, Sir George, who is also chairman of the Council of Economic Advisers to Alex Salmond, the First Minister, told The Scotsman he thought HBOS might have survived with earlier action from authorities on both sides of the Atlantic.

He said: "I have heard it said by people who were close to the transaction that it might not have gone ahead if (the FSA ban on short-selling and US bad bank commitment] had gone ahead a week or two earlier. That was bad luck one way, for HBOS, but good luck for Lloyds TSB.

"There's nothing wrong with short-selling per se in an orderly market. But we had a market where people were obviously trying to make (some banks] fail."

He added that "a degree of indecision" by the government and FSA had contributed to HBOS's likely fall into the arms of Lloyds.

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