Bid for Lloyds branches brings risks and rich opportunities

The enforced sale of 632 Lloyds banking branches has led to speculation not just about who will succeed in the takeover, but also what it could do for...

The enforced sale of 632 Lloyds banking branches has led to speculation not just about who will succeed in the takeover, but also what it could do for competition in the retail banking sector.

The Co-operative Group has been widely tipped as a front runner in the race. Yet hopes seemed to be dashed at the end of last month when some newspapers reported that the 30th September deadline for bids had come and gone, with only one bidder — NBNK — in the race.

But a spokeswoman for Lloyds Banking Group said: “There wasn’t a deadline for bids to be submitted and the only hard deadline that Lloyds has set …is [that] we’ll make clear our intentions for the business by the end of the year.

“In addition to the party that has confirmed it has submitted a bid, we are in active discussions with the other organisations, including Co-op, who have shown an interest in the divested business.”

Its interest in taking over the Lloyds branches has been confirmed by the Co-operative Group but, significantly, it stresses that the matter is being handled by the Group, not at the level of the subsidiary Co-operative Banking Group (as the former Co-operative Financial Services business has been called since last month).

A spokesman for the Group said: “We remain firmly and genuinely committed to the process and continue to have healthy and productive two-way dialogue with Lloyds Banking Group. Any actions we take have to be completely aligned with our members’ long-term interests, and this dialogue will lead to us making an informed decision in terms of next best steps.”

But while there is certainly strong interest by the Group in taking over the Lloyds branch portfolio, there are concerns that it could be too ambitious. Press reports suggest that raising the funds for the acquisition — estimated at a total requirement of £10 billion to £15bn — is likely to stretch any bidder, bar the disclosed proposers NBNK.

But the deal could be particularly challenging for the Co-operative Group. It is still bedding in the wider rebranding programme for its retail stores, which includes more banking facilities being incorporated into shops. This is a big task at the same time as the integration and rebranding of the 248 Britannia branches into the Co-operative Banking Group.

These anxieties have been reported in the financial press to have led to the premature departure of former chief executive Neville Richardson, who came over from Britannia at the time of the merger. This makes the loss of previous Chief Executive David Anderson seem unfortunate. Barry Tootell, Chief Financial Officer at Co-operative Banking Group, has been made acting Chief Executive. He should at least be in a strong position to judge the sense of the potential acquisition, having joined from Lloyds in 2008.

There are other issues to consider. Is this the right time to invest in bricks and mortar? The Co-operative Group has made a strong reputation for itself through its online banking, where it is a sector leader.

To what extent is there a future for bank branches? And there is also the issue of branding strategy: there are four Lloyds’ brands operating within the portfolio for sale, while the Co-op already has three retail banking brands — the Co-op, its online operation Smile and Britannia.
It is, though, the scale of the transaction that offers the greatest threat — and opportunity.

Lloyds is selling 632 branches, its TSB and Cheltenham and Gloucester brands, the online Intelligence Finance business, £64bn of loans and £32bn of deposits. This represents about five per cent of current account and mortgage lending business in the UK. The EU is requiring Lloyds to make the disposals as a condition for it receiving £20bn of state aid from the British Government.

When the size of this portfolio is put against the existing balance sheet of the Co-operative Banking Group, the challenge becomes clear. Total sales from the entire CFS business (as it then was) in 2010 was £2.5bn, while entire Co-operative Group turnover was £13.7bn. If the Group does submit a bid and it succeeds, it will shoot up the banking league table. Fortune may favour the brave, but the bid will certainly require quite some bravery.

These considerations will be at the top of the thoughts of board members of both the Group and the Banking Group. But the Co-op — assuming it does bid — is just one player and is not even best positioned to win. Rumour has it Virgin Money may submit a proposal, as may investment firm Sun Capital, led by well-known City figure, Hugh Osmond. Front runner is NBNK is also itself an investment vehicle established by a City mogul, Lord Levene.

It is understood competition authorities are keen that the Lloyds’ disposal goes to an existing player in a position to challenge the Big Four. This is not necessarily a bar to NBNK. Although it was only established last year, it is negotiating to purchase the Yorkshire Bank and Clydesdale Bank brands.

The possibility that the contest for the Lloyds’ branch portfolio could come down to a shoot-out between NBNK and the Co-op contains a strong irony, not lost on some senior members of the Co-operative Party. One of the NBNK directors is Lord McFall, who as John McFall was Chair of the House of Commons Treasury Select Committee and a long-standing Labour and Co-operative Party MP.

Other NBNK directors have similarly impressive backgrounds. Lord Forsyth, as Michael Forsyth, was a Cabinet minister under Margaret Thatcher, where his positions included Secretary of State for Scotland — which might give lordships Forsyth and McFall something to debate over the coffee while waiting for the board meetings.

Another director is Lord Brennan, a QC who has investigated the relationship of corporate governance with the financial crisis. The fourth peer at the NBNK table is its chairman Lord (Peter) Levene, who as chairman of Lloyd’s of London (the insurance market, not the bank) and former vice chairman of Deutsche Bank is one of the most powerful City figures of all. The other director is Sir David Walker, another major City player and a former deputy chairman of Lloyds Bank, who recently conducted a review of corporate governance in the banking sector for the Treasury.

If I were a betting person, my money would be on NBNK winning the auction. The romantic in me wishes the Co-operative Group well — though if it is successful, my anxiety levels will rise substantially. No doubt, they would rise even more in the Group’s boardrooms.

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