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Monday, 11 June, 2001, 18:01 GMT 19:01 UK
Lloyds' Abbey bid decides future
To block or not to block; that is the question confronting trade secretary Patricia Hewitt over Lloyds TSB's £20bn bid for Abbey National. As BBC News Online's Jorn Madslien reports, her decision could decide the future shape of the UK's banking sector.
Bank customers and investors in banking shares will both be seriously affected when the Department of Trade and Industry decides on whether or not to let Lloyds TSB's bid for Abbey National to go ahead.
She will then have to decide what to do.
If she clears the deal, it could accelerate the ongoing consolidation in the UK banking market.
The country's four largest banks would begin a frenzied scramble to snap up the remaining small and medium sized banks, warned the Consumer Association's principal policy advisor Phil Evans.
A rejection of the deal, on the other hand, would effectively bring the consolidation process to an end in the UK banking industry, said analysts.
For Lloyds, this would be bad news.
"Lloyds needs a substantial acquisition in a new market to provide growth going forward," said Barclays Stockbrokers' banking analyst, Ian Hodges.
But the voice of the consumer was categorical: "Block it," said Mr Evans.
"It is definitely a merger too far and it would freeze the current account market completely."
Mr Evans referred to a 25% limit on a bank's market share, as set down by the Competition Commission.
The Lloyds bid for Abbey is controversial, because, combined, the two banks' market share would be just under 27%.
The Competition Commission is expected to deem that too much, not least because "existing account holders don't seem to be bothered about shopping around for better deals", said Barclays Stockbrokers banking analyst Ian Hodges.
Close to call
But the markets are not taking anything for granted.
The Competition Commission faced a close call in reaching its decision, predicted stock broker Charles Stanley's banking analyst Nick Clarke.
"[The deal] either gets blocked completely or it is allowed but with conditions," agreed Mr Hodges.
But what form these conditions would take is hard to predict.
Structural remedies, such as handing over some of its current accounts to other banks, appear unworkable, according to Mr Evans.
Another solution that has been mentioned would be for Lloyds to start paying interest rates on its current accounts, but this, said Mr Hodges, would simply spell the end to free current accounts in the UK.
Selling Lloyds' mortgage subsidiary C&G would not do much to safeguard the deal either, said Mr Evans, since this would not change the all-important current account market share.
And remedies where the bank would be asked to change its behaviour would be completely ineffective, he said.
Ms Hewitt is not expected to announce a decision until late in July at the earliest, according to a Competition Commission spokesman.
But account holders and investors may not have to wait that long for an outcome.
The regulatory complications are expected to be overwhelming, reportedly to the extent that Lloyds is prepared to walk away from the deal.
This rumour sent Lloyds shares into a tailspin on Monday, down 3.5 percent to 721.5p.
The other big banks in the UK, most notably Barclays, could well be interested in taking over Abbey if Lloyds loosens its grip.
Though if the Competition Commission blocks the Lloyds deal, they are unlikely to take on the challenge, said Mr Evans.
Instead, Barclays is expected to focus on its international strategy; having already said it wants to boost its overseas earnings from 20% to 50% in the near future.
A similar route may be the lifeline Lloyds has been looking for.
After all, the bank has "talked about Europe for a long time", said Mr Hodges.
The European option
Europe's banking markets remain much more fragmented than the UK market, and consolidation is only just beginning, said Mr Hodges.
The logic behind a European acquisition would be similar to recent UK deals - banks are bought by and merged with other banks in an effort to cut costs by closing branches and sacking staff.
The difficulty faced by UK banks wishing to move into Europe, beyond resistance from trade unions and governments, is that the first deal would dilute their return on equity.
This is because UK banks tend to deliver higher returns than European banks, so merging with a poorer performer would dilute its share price.
Therefore, reasoned Mr Hodges, such a push must be seen as a strategic move that is costly in the short term but pays off in the long term.
In the past, shareholders have been loath to accept such moves.
But European banks have already started buying and selling each other, and this puts pressure on Lloyds to make a move before the best deals have gone.
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