Over 10 percent of the retail banking
market branch network in the UK is available to buy as Lloyds
Banking Group and Royal Bank of Scotland pay the price for
accepting state aid during the height of the economic crisis in
late 2008. But given the perilous nature of the UK economy, will
there be interest? Dan
Jones
reports

A week after the European Competition
Commission foisted a harsher-than-expected breakup plan upon Dutch
bancassurer ING (see RBI 621),
troubled UK institutions Royal Bank of Scotland (RBS) and Lloyds
Banking Group have announced the terms of their own preliminary
restructuring agreements with the Commission.

The requirements which will weaken
their respective footholds in the UK retail banking market but
ultimately avoid a wholesale realignment of their businesses.

It will also open up the UK market to
further competition: the moves come at a time of widespread change
in the country’s consumer banking market with new entrants such as
Tesco Bank and Metro Bank looking to take market share from
depressed incumbents such as RBS and Lloyds as well as
reinvigorated and bullish banks such as Santander, HSBC, Barclays
and even the Post Office.

Lloyds Banking Group - retail impairments, 2008-2009

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A number of Asian banks, including State Bank
of India, ICICI, Bank of Baroda and Bank of China, are
also upping their game in a market that remains in turmoil in the
wake of the financial crisis.

And while the deals for RBS and Lloyds are
stringent in their disposal requirements, a case can be made for
both banks having avoided an even worse fate.

The EC, headed by outgoing competition
commissioner Neelie Kroes, has not, for example, required RBS to
shed its 1,200-branch-strong US subsidiary, Citizens, in contrast
to the ING settlement, which required the Dutch firm to dispose of
its high-profile and successful ING Direct US unit by 2011.

 

Lloyds, meanwhile, was itself eager to
highlight that the situation could have been more severe.

Avoiding the GAPS will also ensure that the UK
government will not increase its current 43 percent stake in
Lloyds, but will see the bank raise £22.5 billion ($37.7 billion)
in fresh capital.

But despite such actions, the EC’s
requirements remain far from insubstantial: Lloyds has been told to
dispose of a business with the equivalent of 600 branches, a 4.6
percent current account market share and approximately 19 percent
of the group’s mortgage balances.

The bank believes that it will be able to
fulfil these requirements by divesting:

• the TSB brand;

• the 146 branches, savings accounts and
branch-based mortgages of its Cheltenham & Gloucester
subsidiary;

• the 200 branches and branch-based customers
of Lloyds TSB Scotland and a related banking licence;

• additional Lloyds TSB branches in England
and Wales; and

• its Intelligent Finance online banking
unit.

All the units would need to be disposed of
within four years; working from 31 December 2008 figures Lloyds
estimates that the businesses comprise £70 billion in customer
lending, £30 billion in customer deposits, £18 billion of
risk-weighted assets and contributed £500 million in pre-tax profit
to the group in 2008.

For RBS, complying with the EU regulations has
seen it agree in principle to the disposal of:

• a portion of the RBS branch network in
England and Wales – 312 branches – to be sold under an existing
brand name, ‘Williams & Glyn’s’;

• the six NatWest branches in Scotland;

• direct SME customers across the UK; and

• RBS Insurance, merchant acquiring business
Global Merchant Services, and its interest in global commodities
trader RBS Sempra Commodities.

The RBS retail banking businesses on the
block, comprised in total of 318 branches, equal 1.7 million retail
customers and £20 billion of assets. The bank itself said they
represent a two percentage point share of the UK retail banking
market.

Further disposals would be required in the
event of RBS’s core Tier 1 capital ratio falling below 5 percent
within the next five years, or its existing funding balance sheet
reduction targets for 31 December 2013 being missed by 10 percent
or more.

Only a severe double-dip recession would
likely bring about such a scenario, and in such circumstances RBS
would divest a further £60 billion in risk-weighted assets via
further disposals.

 

Bad debts

Royal Bank of Scotland –
impairment charges, 2009

 

Q109 (£m)

Q209 (£m)

Q309 (£m)

UK Retail

400

500

400

Ulster Bank

100

100

100

US Retail & Commercial

200

100

200

Non-Core

1,800

3,500

2,100

Source: RBS

 

As with Lloyds, RBS has until 2013 to dispose
of the businesses. The bank said that divestments “may be effected
through initial public offerings […] in particular, RBS Insurance
is seen as a potential IPO in the later years of RBS’s strategic
plan”.

RBS added that divestments “will be timed to
maximise value”, but the bank will likely have to compromise in the
case of some units: its proposed sale of RBS Insurance earlier in
2009 was scrapped after no bidder was prepared to meet a valuation
that was seen by many analysts as overly ambitious.

Both bank’s retail banking businesses are
likely to attract attention from a range of interested parties,
with the UK government, in particular, eager to portray the
divestments as part of its attempts to introduce more competition
into the UK retail banking sector.

“To ensure these divestments increase
diversity and competition in the UK banking market, the assets can
only be sold to small or new players in the market,” said the UK
Treasury in a 3 November statement.

UK bank branch numbers, H109

“The divestments from each bank will represent
a viable stand-alone entity, together representing nearly 10
percent of the UK retail banking market.”

Some parties have already voiced their
interest in some of the assets for sale, a pool of assets which
will be joined on the market by the ‘good bank’ set to be created
from the existing portfolios of state-owned Northern Rock.

Tesco, Virgin, HSBC, State Bank of
India

Both Virgin Money UK and Tesco Bank
have voiced their hypothetical interest in purchasing assets from
RBS and Lloyds.

On 10 November, HSBC chief executive
Michael Geoghegan said HSBC “would be interested in certain
portfolios”, but added the bank was “somewhat frustrated” at the
prospect of existing market players such as HSBC being shut out of
any such deal.

Such restrictions will not extend to foreign
banks, according to John Kingman, the outgoing chief executive of
UK Financial Investments, which manages the government’s bank
stakes. “I envisage no restrictions on the nationality of ownership
on any of our investments”, Kingman said on 4 November.

Resurgent Asian banks may show keen interest
in expanding in the UK. In October, State Bank of India (SBI),
India’s largest bank, for instance, said it is looking to make
acquisitions of up to $1 billion in the UK.

SBI chairman OP Bhatt has stated the bank’s UK
focus would be on capturing business from non-Indian clients rather
than non-resident Indians, adding the 40 percent growth rate seen
at the bank’s $3 billion UK business over the past two years was
expected to continue (see RBI 620).

RBI
DealWatch

RBI DealWatch tracks
global financial services mergers and acquisitions, privatisations
and demutualisations, flotations, divestments, share stakes,
strategic alliances and joint ventures.

Country

Participants

Type/value

Description

Date

Europe, Middle East,
Africa

Ireland

Numerous

Bad bank'

Ireland’s parliament has approved the
creation of a bad ban; a €54 billion ($80 billion) unit which will
start transferring commercial property loans from the country’s
banks in January next year (see page 3).

13 Nov

Estonia

Swedbank

Capital increase

Swedbank has boosted the share capital of its
Estonian unit by €400 million ($595 million) as it attempts to
mitigate the effect of loan losses in its Estonian, Latvian and
Lithuanian businesses.

13 Nov

Greece

Emporiki Bank

Capital raising

Emporiki, the Greek subsidiary of France’s
Crédit Agricole, has said it plans to proceed with a capital
raising of up to €1 billion following a recent board meeting.

12 Nov

UK

Lloyds Banking Group

Capital raising

Lloyds Banking Group has increased the amount
of capital it plans to raise from £21 billion to £22.5 billion
following sizeable demand from bondholders for its debt-to-equity
contingent convertible instruments.

12 Nov

Oman

Bank Muscat, Silkbank

Stake decrease

Oman Bank Muscat has said it will not
subscribe to the rights issue being held by Pakistan's
Silkbank, in which it currently holds a 35 percent stake, with its
stake set to be diluted as a result.

11 Nov

Spain

UniCredit, Banco de Sabadell

Stake divestment

Italy’s UniCredit, the country’s largest bank
by assets, has sold its 3.23 percent stake in Spain’s Banco de
Sabadell to institutional investors for a total of €168.6
million.

10 Nov

Denmark

Jyske Bank

Capital raising

Jyske Bank, the second largest bank in
Denmark, has announced it will issue 10.8 million new shares in a
rights issue which will allow it to decline a hybrid core capital
injection from the Danish state.

09 Nov

Poland

Bank Millennium

Capital raising

Bank Millennium, the Polish subsidiary of
Portugal's Millennium BCP, has announced a ZLO1 billion
($350 million) share sale for the first quarter of 2010.

06 Nov

Russia

MDM Bank, Siguler Guff

Stake acquisition

US private equity group Siguler Guff has
purchased a 3.3 percent stake in Russia's MDM Bank from SM
Group, one of the bank's founders.

05 Nov

South Africa

Old Mutual, Nedbank

Strategic review

Old Mutual’s chief executive, Julian Roberts,
has said a decision regarding the future of the bancasssurance
group's structure will be revealed at the time of its 2009
results in March, amid renewed speculation that banking subisidiary
Nedbank could be sold.

05 Nov

Nigeria

First Bank

Potential acquisition

The chief executive of Nigeria’s First Bank
has said the bank is planning an international acquisition. Bisi
Onasanya said any such purchase would be in-part funded by a
planned $3.3 billion bond.

04 Nov

UK

Lloyds Banking Group, Royal Bank of
Scotland

Forced divestments

The European Union has moved to break up
Lloyds Banking Group and Royal Bank of Scotland (RBS) following
their government bailouts last year. The banks will shed 600 and
318 branches respectively as well as a host of other units and
assets (see above).

03 Nov

UK

Lloyds Banking Group, Bank of New York
Mellon

Divestment

Lloyds Banking Group has completed the
divestment of its fund management business Insight Investment to
Bank of New York Mellon. As part of the deal Lloyds will transfer
the investment management of some funds from Insight to its
Scottish Widows Investment Partnership business.

02 Nov

UK

Northern Rock

Forced divestment

The European Commission has approved the UK
government’s request to split failed mortgage lender Northern Rock
into two parts, a good bank and a bad bank, with the good assets to
be sold off to a new entrant into the UK retail banking market (see
above).

28 Oct

Country

Participants

Type/value

Description

Date

Europe, Middle East, Africa
(continued)

 

Global

ING

Forced divestment

Dutch bancassurer ING is being forced to sell
its insurance business, its ING Direct business in the US and other
assets as part of an EU restructuring plan (see RBI 621). The group
has said it has already received numerous enquiries about its
insurance business, with those that have expressed their interest
including the UK’s Aviva.

26 Oct

UK

Barclays, Standard Life Bank

Acquisition

Barclays has acquired Standard Life Bank from
UK insurer Standard Life for £226 million ($370 million), adding
287,000 savings accounts with a total balance of £5.5 billion and
78,000 mortgage accounts to its existing UK retail banking
assets.

26 Oct

Greece

Alpha Bank, EFG Eurobank, Piraeus

Capital raising

Alpha Bank has announced a €986 million
($1.47 billion) rights issue in a bid to pay back preference shares
owned by the Greek government. EFG Eurobank and Pi raeus Bank have
said they have no plans to follow suit.

21 Oct

Netherlands

DSB Bank

Bankruptcy

The Netherlands’ DSB Bank has been declared
bankrupt after a buyer was not found before a deadline set by the
Dutch government, which seized control of the bank on 12 October.
The country’s leading banks will cover the return of DSB’s customer
deposits. The bank had a 15 percent of the consumer loan
market.

19 Oct

The Americas

US

United Commercial Bank

Bank failures

The number of US bank failures in 2009 has
reached three figures, with the failure of United Commercial Bank,
a San Francisco-based lender with $11.2 billion in assets, being
the largest failure of recent weeks. The total number of bank
failures so far this year now stands at 123.

13 Nov

US

HSBC, Santander

Acquisition

Santander is to purchase HSBC’s US vehicle
loan servicing operations and $1 billion in vehicle loans, the UK
bank has announced. The $904 million deal is expected to close in
the first quarter of 2010.

10 Nov

US

Citigroup, Primerica

IPO/divestment

Citigroup has announced that its Primerica
life insurance subsidiary is preparing for an initial public
offering, upon the completion of which Citi will divest its
remaining interest in the company.

05 Nov

Uruguay

Crédit Agricole

Divestment

France’s Crédit Agricole has begun
consultations with a view to sell its Uruguayan retail banking
subsidiary Crédit Uruguay Banco.

27 Oct

US

Bank of America, First Republic

Acquisition

A consortium of private equity firms have
agreed to purchase Bank of America’s First Republic wealth
management subsidiary for $1 billion. The private bank will retain
its current management team and the deal is expected to close in
the second quarter of 2010.

21 Oct

US

ING, Reinsurance Group of America

Acquisition

Reinsurance Group of America (RGA) has agreed
to purchase US and Canadian life, accident and health reinsurance
businesses from ING subsidiary ReliaStar. RGA will invest $115
million of capital into the businesses, though other financial
details were not disclosed.

16 Oct

Brazil

Banco do Brasil, IRB brasil

Potential acquisition

Banco do Brasil, Brazil’s largest bank by
assets, is in talks to buy a majority stake in IRB-Brasil, a
state-run reinsurer, a regulatory filing has revealed.

15 Oct

US

US Bank, BB&T

Acquisition

US Bank, the sixth-largest bank in the US by
deposits, has agreed to purchase $800 million worth of deposits
from BB&T as well as some branches in the state of Nevada.
BB&T itself acquired the deposits as part of its recent Federal
Deposit Insurance Corporation-assisted purchase of the failed
Colonial Bank

14 Oct

Asia-Pacific

India

HDFC, Credila Financial

Stake acquisition

India’s HDFC Corporation has agreed to
purchase a 41 percent stake in education loan provider Credila
Financial Services from DSP Merrill Lynch. Financial details were
not disclosed.

13 Nov

Hong Kong

Bank of East Asia

Possible sale

Hong Kong lender Bank of East Asia has seen
its share price rise by over 25 percent in just two days following
speculation that the bank could be subject to a takeover bid.

12 Nov

Thailand

Kasikornbank, Fortis, Muang Thai Group

Stake increase

Thailand’s Kasikornbank has increased its
stake in insurer Muang Thai Group from 10 percent to 51 percent
after a striking a deal with Fortis which will see the Belgian
bancassurer's stake in the group's life insurance
activities fall from 40 percent to 31 percent.

09 Nov

India

ICICI, Firstsource, Temasek

Stake reduction

ICICI has acknowledged rumours that it is to
reduce its 26.6 percent stake in Indian business process
outsourcing firm Firstsource, but said that it is not contemplating
any “specific steps” for now. Singapore sovereign wealth fund
Temasek is also rumoured to be reducing its stake in the firm.

09 Nov

China

China Minsheng Bank

Initial public offer

China Minsheng Bank, the seventh largest bank
in China, is to raise up to $4 billion after its twice-delayed Hong
Kong initial public offer finally commences in November.

08 Nov

Japan

Sumitomo Trust & Banking, Chuo Mitsui

Merger

Japanese trust banks Sumitomo Trust &
Banking and Chuo Mitsui Trust have agreed to merge in a deal which
will create Japan’s fifth-largest bank. The ¥35 trillion ($392
billion) asset institution will have 119 branches and 39
sub-branches in Japan and total deposits of ¥20.8 trillion.

03 Nov

India

State Bank of India, associate banks

Acquisition

State Bank of India has begun the process of
incorporating the country’s six associate banks after the board of
State Bank of Indore approved SBI’s plans to acquire the associated
bank.

02 Nov

China

HSBC, Bank of Communications

Joint venture

HSBC has partnered with Bank of
Communications, in which it holds a 19 percent stake, to transfer
their existing joint credit card activities in China to a new joint
venture company (see page 9).

28 Oct

Vietnam

HSBC, Bao Viet Holdings

Stake increase

HSBC has paid VND1.88 trillion ($105.3
million) to increase its stake in Vietnam’s largest insurance and
financial services group, Bao Viet Holdings, from 10 percent to 18
percent.

22 Oct

Indonesia

RHB Bank, PT Bank Mestika

Acquisition

Malaysia's RHB Bank has purchased
Indonesia’s PT Bank Mestika for RM1.16 billion ($340 million) as it
expands its presences across south-east Asia. Mestika had assets of
$122 million as of 31 December 2008.

20 Oct

Taiwan

AIG, Nan Shan Life

Acquisition

Bailed-out US insurer American International
Group (AIG) has agreed to sell its Taiwanese life insurance
business Nan Shan Life for $2.15 billion to Primus Financial and
China Strategic Holdings.

13 Oct

Source: RBI