Thursday, 28 April 2011

Why the ICB recommendations make it more difficult for new entrants to retail banking

The interim recommendations of the Independent Commission on Banking suggest that Lloyds Banking Group should dispose of significantly more than the 600 branches that they have already been instructed  by the EU to sell for taking state funding and that these branches should be bundled together with the sale of Northern Rock to create a really significant competitor to the big 5 banks: Barclays, RBSG, HSBC, Lloyds Banking Group and Santander. Whilst this might make sense in theory, practically rather than making it easier for a new entrant this recommendation, if followed through, would make it far more difficult.

For a start whilst the Commission might think that one retail bank is like another one and therefore one branch from a bank is much like a branch of another, the truth is anything but that. Bundling Lloyds Banking Group's branches together with Northern Rock's make the integration for any purchaser easier nor does it make the integration simply twice as complex, but would make for a more complex integration than anyone has tried before. The branch systems aren't the same, the branch processes aren't the same, the employment contract's aren't the same and the list goes on.

Santander, which has more experience than any other bank in integrating acquisitions, (still completing the final integration of Abbey National, and currently integrating Alliance & Leicester and the branches of Bradford & Bingley) has recently announced that the integration of the mere 318 branches that it bought from RBSG, as a result of the forced disposal RBSG had to make for taking state funding, is proving to be more challenging than originally thought. The deal was announced in August 2010 and, at that time it was stated that the integration would be complete by the end of 2011, 16 months later. The latest estimate is that it will now complete at the end of the first quarter of 2012. This was the integration of only just over half the number of branches that Lloyds has been told to dispose of let alone the additional 'significant' number that the ICB is going to recommend on top of that plus the 70 Northern Rock branches.

It doesn't take much imagination or practical experience to understand how much more difficult the proposed integration would be, not only because of the sheer scale, but also, since none of the current big 5 banks will be allowed to bid for the branches, the lucky winner will have little or no experience of operating this size of bank in the UK, nor are they likely to have an existing infrastructure (unlike Santander) that will scale to handle this size of operation.

Funding is another signifcant issue that the ICB does not appear to have considered. Putting aside the amount of capital that will be required to purchase the branches (not something to be taken lightly), there is a question of financing the gap between the deposits bought and the loans acquired. Just for the disposal of the 600 Lloyds Banking Group branches it is estimated that the purchaser will need between £15-20bn of bridging finance. This is because the 600 branches come with far more loans than deposits. There aren't many new entrants who would want to take on the cost of the capital to buy the branches and a £15bn overdraft. Consider how much more capital and bridging finance would be required for the additional branches and Northern Rock.

By suggesting bundling together the LBG 600 plus the LBG additional branches plus Northern Rock, the ICB is effectively eliminating any truly new entrant and rather opening up the opportunity to only a large foreign bank, which is hardly going to encourage the new competition that the ICB is saying that it is seeking. 

1 comment:

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