EU break-up threat looms over Britain’s Lloyds

By Reuters Staff
September 16, 2009

A pedestrian passes the head office of the Lloyds Banking Group in central London August 5, 2009. REUTERS/Stefan Wermuth By Clara Ferreira-Marques
LONDON, Sept 16 (Reuters) – Lloyds Banking Group, Britain’s largest retail bank, faces an uncertain future as the EU considers whether to force a carve-up of its current structure and the sale of its Halifax unit, analysts said.

Neelie Kroes, competition commissioner for the EU’s executive, has yet to make a decision on what to do to address competition concerns after Lloyds, 43 percent owned by the UK state, received billions of pounds in state aid.

One source familiar with the situation told Reuters on Wednesday that Lloyds had not yet received detailed indications from Brussels and it was too soon to predict a final ruling.

But the Times newspaper revived concerns of a draconian ruling from EU authorities, saying Brussels could force the bank to sell off all or part of Halifax, Britain’s biggest mortgage provider — effectively unpicking Lloyds’ takeover last year of beleaguered rival HBOS, which owned the unit.

“It erodes part of the reason for the (HBOS) deal,” said one top-ten investor who declined to be named.

“They basically got to do a deal which they would never have been able to do otherwise. They have taken the downside of the bad books and if they don’t get to keep the prize as part of a larger franchise, that would be quite a negative.”

Lloyds agreed to buy HBOS, hobbled by billions of pounds of toxic loans, in a government-engineered takeover to prevent its heavily leveraged rival from succombing to the credit crunch. An EU ruling to force a sale of Halifax would directly contradict last year’s decision by UK authorities to overrule competition concerns in order to shore up the UK banking system.

It would also jeopardise hopes of a return to normalised earnings in the short term for Lloyds, analysts said.

“If you had to sell off Halifax the whole game changes. Halifax retail is probably about 20-25 percent of pre-impairment profits in 2010 and the synergies (from the HBOS deal) all go out the window as well,” analyst Mike Trippitt at Oriel Securities in London said.

“This completely impacts Lloyds’ operating profit. It was a (takeover) deal, rightly or wrongly, done to save HBOS and to stabilise the UK banking system and now they have to get it done and eliminate uncertainty.”

Other analysts said Lloyds should revisit plans to reduce its participation in the government scheme to insure bad debts, possibly by selling peripheral assets and raising the remainder through a rights issue. Industry sources said last month the bank was gauging the market appetite for a rights issue.

Lloyds had been expected to sell assets to gain EU approval for the government-sponsored asset protection scheme, including its 164-branch Cheltenham & Gloucester arm and making disposals in Scotland. But Kroes could force Lloyds to go beyond that.

“What (the Commission) are talking about Lloyds giving up sounds a lot like Halifax,” the Times quoted one person close to the negotiations with Brussels as saying.

The paper said Lloyds, keen to hold on to the Halifax name, could offer up 1,000 branches for sale as a
compromise.

A Lloyds spokesman said the bank declined to comment on speculation. Kroes’s spokesman also declined to comment.

DRACONIAN MEASURES
Kroes has made no secret of her concerns over both Lloyds and Royal Bank of Scotland, 70-percent state-owned. In June she had already cited “problems” with Lloyds’ share of the UK retail banking market.

Halifax is one of Britain’s strongest high-street banking brands and a new cornerstone of Lloyds’ home loans business. Lloyds became Britain’s top mortgage lender, responsible for roughly one in three home loans, after it bought HBOS earlier this year.

Lloyds also holds the lion’s share of Britain’s current accounts, with just over a third of the market.

“Inevitably the ultimate result will be somewhere in the middle of the two extremes — the Commission threatening to rip out Halifax and Lloyds offering up C&G, which has just 164 branches, and branches they were willing to shut down (until last month),” said one analyst who declined to be named.

The EU’s executive told Reuters on Tuesday that it was just weeks away from having all the information it needs to make a decision on the bank and its plans to use a government-sponsored asset protection scheme to protect it against further losses.

Kroes will leave her job as early as next month with the end of the current Commission’s term in office.

“In one scenario (the ruling) could be quite draconian. In another, it could be quite benign. There could be potential buyers of the assets — it doesn’t necessarily have to be value-destroying,” a second source familiar with the situation said.

But finding buyers could be a hurdle. Spain’s Santander has long been seen as a potential buyer but it is already the second biggest player in the UK mortgage market.

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