The merger of Lloyds TSB and HBOS creates a new superbank, but raises questions over Scotland's significance, finds Terry Murden
I told analysts earlier that I rarely use superlatives but this is a truly wonderful combination
THEY call him the Quiet American, largely due to his laidback Montana drawl and the impression he gives that nothing would faze him. Eric Daniels, a c
areer banker hitherto considered safe but boring, is now making his voice heard among those in the City who questioned a strategy that has just secured him a place at the industry's top table.
The hurried acquisition of HBOS at a bargain price turns the larger Lloyds TSB group into Britain's biggest retail bank and has shaken the foundations of Scotland's nervous financial services sector.
But Daniels, whose tour of duty has taken him to Chile, Argentina and the US before joining Lloyds seven years ago, sees the combination with Halifax and Bank of Scotland as his opportunity to build a group that could regain its former title as Europe's biggest bank.
Daniels kept Lloyds TSB out of the riskier end of the banking world after deciding not to follow his rivals into investment banking, and he stuck by Scottish Widows while some called for it to be sold.
With his critics silenced on both counts, he's now got himself a whole new set of businesses – from Bank of Scotland business banking to the mortgage provider Intelligent Finance. But questions are coming thick and fast about what he does with them and how his bigger bank can breathe new life into a business model that was deemed to be on its knees.
Daniels, 57, was elevated to chief executive of Lloyds TSB five years ago as reward for turning around a lacklustre retail division. It was a slow start that showed little sign of picking up speed until the last year or two when Lloyds, largely immune to the worst of the credit crunch, showed signs of growth.
But while recognition may have given him a warm glow, the capture of HBOS has clearly ignited his ambitions. At a hastily arranged press conference at the offices of investment bank Dresdner Kleinwort on Thursday, his normally unexpressive face lit up as he described the outcome of an extraordinary week.
"I told analysts earlier that I rarely use superlatives but this is a truly wonderful combination," he said. He clearly found it so wonderful that he repeated the word twice more when he gushed about a "wonderful beginning" and a "wonderful franchise".
Daniels, flanked by his chairman Sir Victor Blank and the chief executive of HBOS Andy Hornby looked like a child who had just been handed his Christmas presents three months early. But as he sat pondering his newly expanded role as chief executive of the larger group there were more unanswered questions despite an hour of grilling from the City's financial press, leaving the distinct impression that, despite the two sides having talked "theoretically" for "several years" and with greater meaning for "six weeks", there was a lot of detail yet to be decided.
The clear message was that the new Lloyds-HBOS tie-up was a marriage made in banking heaven, though this lack of detail and uncertainty over the merit of combining two mid-market banks left the City's banking analysts and the media wondering whether the enlarged group would be so much better off than the two parts.
The tie-up will be "earnings accretive" (adding value per share], according to James Hutson, an analyst with Keefe, Bruyette & Woods. However, he warned the combined group will be left in a weakened capital position unless it sells some assets. "It will have to consider asset-dumping of non-core parts of the business to improve capital ratios," he said, adding that HBOS's Australian operations may be among the businesses put up for sale.
There is much speculation over what may or may not be offloaded, but sources say nothing has been decided and the key brands – Widows, Halifax and so on – will be retained. The Bank of Scotland name will remain as will the offices on The Mound as the Scottish headquarters of a group that will otherwise be based in London.
Rather than contract, the indications are that the enlarged group will be in a position to expand in Scotland and fears for jobs may be overdone. Blank described the reports of 40,000 jobs to go throughout the group as "the product of someone's imagination. It is a ridiculous number". But he wouldn't provide one of his own, arguing it was too early to do so.
The new group will see its share of the UK mortgage market rise to 30%, a clearly advantageous position in boom times. But this level of exposure in the current crisis is considered a potential Achilles Heel. Daniels, speaking after Thursday's formalities, said he was "not uncomfortable" with that figure and that even if the market falls further "it is not a reason long term to say you don't want to be in that business". Unlike the US, he said the UK has a shortage of houses that will sustain demand.
The combination of its numerous businesses and the increased scale that comes with this unison should help the group achieve what are now publicly declared international ambitions. Daniels' dream of competing on an equal footing with Barclays, HSBC and RBS is there to be realised, though analysts warn that the current climate will hinder any such plans for a year or two.
But doubts remain about the merits of the deal. Ryan Kneale, market analyst with Bets for Traders, said: "I don't know why Lloyds wanted to take on HBOS. Gordon Brown has done a good job for HBOS's shareholders and workers, but I don't see it as a great deal for Lloyds TSB."
He said this was reflected in the fall in the Lloyds' share price in the aftermath of the announcement. About 84% of bets received by Bets for Traders on Lloyds on Thursday were backing its share price to fall. As Bets for Traders is a bookmaker it is not affected by the FSA ban on short-selling. On Friday, Fitch, a credit agency, placed HBOS and Lloyds TSB on "rating watch negative". At the press conference, Daniel, Blank and Hornby were asked repeatedly that if HBOS was struggling to raise funds in the wholesale market, why would the bigger group find it so much easier. Would this merely shift the problem from HBOS to Lloyds and put pressure on the latter's shares?
Daniels made it clear that Lloyds was not involved in some of the more riskier financial instruments and the combined group's capital ratios were robust with scope for becoming the best in the sector.
But it is known that other banks were becoming reluctant to lend more money to HBOS and it was heading for funding problems in the next few months. A clearly chastised Hornby, explaining why the board was eager to do a deal with Lloyds TSB, admitted: "I believe we would have continued to fund successfully, but we were not prepared to take that risk."
The new group's name is becoming a hot potato. HBOS was not universally popular, and chairman Lord Stevenson, once questioned its pronunciation during his address to the annual meeting. "Lloyds Halifax" was doing the rounds last week but is believed to be a non-starter. Daniels, with his global business background and multi-cultural background (he is the son of a German father and Chinese mother and is married to a Panamanian] may regard the Anglo-Scottish debate over the name to be an issue best left to those with more time on their hands.
A more vexing issue was what to do with Andy Hornby. He'll get his Lloyds TSB shares in the same ratio to his current holding, just like everybody else. However, it is understood a job has been found for him. As far as Blank was concerned, the board was "delighted Andy will be staying with us to ensure the success of the combined enterprise".
In the short term, at least, commentators believe Hornby will have a role to play while the combined entity is put on a solid footing. Hutson said: "Given the size of the new group and its loan book, which Andy Hornby played a large part in building up, I guess it's reasonably important to keep him. This will be particularly true during the initial parts of the integration."
Both parties have substantial pensions, life insurance and investment businesses and there is likely to be some merging of functions to achieve some of the £1bn of savings that Daniels has identified. It may reignite speculation about the future of Scottish Widows, although chief executive Archie Kane appears to be playing a front-of-shop role in presenting the merger's credentials.
As for the investment business, the HBOS-owned Insight suffered the loss of Douglas Ferrans, one of the sector's higher profile managers and although Scottish Widows Investment Partnership has had its troubles over the years it may emerge as the stronger of the two in any plans to combine their operations.
It will be an uneasy time for the group's 150,000 employees until such time as the new board is constituted – a key role for rising star Helen Weir, head of retail banking at Lloyds TSB, must surely be on the cards – and it has had time to decide exactly what it wants to do with its new charge.
Blank will spend the weekend at his Oxfordshire manor house catching his breath after a week of events he thought would never happen, bringing to fruition a merger he has coveted for two and a half years. Daniels and Hornby will have mixed emotions, the former delighting in his new role, Hornby wondering if his future really does lie with the company.
It will be three months before the deal is completed and, although there was talk of a rival gatecrashing the merger, it looks as if 2009 will usher in the new era for Scottish banking. A new era that nobody predicted just seven days ago.
Additional reporting by Rosemary Gallagher
The full article contains 1713 words and appears in Scotland On Sunday newspaper.
