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Wednesday, 25 April, 2001, 16:07 GMT 17:07 UK
Bank of Scotland: Lucky at last?
Bank of Scotland's head office in Edinburgh
This is Bank of Scotland's third attempt at a merger
It could be third time lucky for the Bank of Scotland.

The bank has just announced that it is in merger talks with Halifax, its latest attempt to tie the knot with another bank.

The deal could yet be gatecrashed as Australia's NAB and the Prudential are both tipped to have an eye on the Scottish bank.

But if the merger goes ahead, it could create a "fifth force" in the UK banking sector, long dominated by four top banks, and result in making the market more competitive.

The 28bn merger would put the new banking group at the bottom of a UK league which includes Royal Bank of Scotland, now owner of NatWest, Lloyds TSB, Barclays and HSBC.

Unlike previous UK mergers, such as that between Royal Bank of Scotland and NatWest, there is little overlap between the two banks - either geographically or in business terms - so there are unlikely either to be huge redundancies or branch closures.

A good deal?

Even without substantial cost savings, the deal is seen as a good move for the two banks concerned.

Halifax is the UK's largest mortgage provider and with over 20 million customers and balances of over 80bn in savings, it is in a good position to provide Bank of Scotland with ready funding for corporate lending.

So, Bank of Scotland will gain access to a cheaper funding base as well as a substantially increased customer base.

Halifax will benefit from Bank of Scotland's experience in credit cards as well its corporate and small business expertise.

Some cost savings and revenue synergies are expected, in IT and at the head office, while one analyst suggests that this could be as much as 500m.

No longer solo

Early last year, the Scottish bank made it clear that while a solo future might be viable, it is no longer desirable.

Since it lost out in the bid for a hostile takeover of National Westminister Bank last year, it has put on its best frock and been looking for a suitor.

For a while, this seemed to be Abbey National.

But earlier this year, the Abbey terminated merger talks with Bank of Scotland, over complications presented by the counter bid from Lloyds TSB for the former building society.

Competition

Now the Lloyds TSB/Abbey deal is facing regulator scrutiny.

Ironically, a merger between Halifax and Bank of Scotland could ease the regulatory path for Abbey and Lloyds TSB.

Teather & Greenwood banking analyst Sarah Horder, says the creation of a fifth force might soften the regulator's stance on a Lloyds TSB/Abbey National takeover.

But, as its previous attempts at merger indicated, there is no guarantee that either deal will reach the finishing line.

"It could still break down for a number of reasons, not least of all management and head office concerns. There is also a reasonable possibility that someone else could enter the fray for the Bank of Scotland," the banking analyst added.

Suitors waiting in the wings include NAB and Prudential, whose potential merger with an American partner could yet be derailed.

Regulatory concerns, however, are thought to be few.

The fact that the OFT cleared the chance of a Bank of Scotland/Abbey National merger earlier this year makes it more likely that Bank of Scotland/Halifax deal will be cleared.

Banking competition

The banking and insurance sectors have been subject to increased competition and this, as well as falling share prices, have led to increased merger activity in the sector.

Chief executives are feeling pressure from shareholders and boards to focus on mergers and acquisitions in an effort to improve returns.

Barclays has taken over Woolwich, NatWest was the subject of a hostile takeover battle, while Abbey National took over Scottish Provident, a mutual insurance company, and Lloyds TSB bought Scottish Widows.

Online newcomers such as internet banks Egg and Smile (run by the Prudential and the Coop Bank respectively) have offered cheaper rates which threaten to cut existing margins.

The merger wave isn't just concentrated in the UK, it is also evident across Europe. French banks led the way when Banque National de Paris took over Banque Paribas.

The German banking sector is also rife with rumours as well as attempts at consolidation, with giant insurer Allianz buying Dresdner.

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See also:

25 Apr 01 | Business
Halifax and BoS discuss merger
25 Apr 01 | Business
Q&A: The Halifax - BoS merger
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