The way was paved on Tuesday for the biggest shake-up in Britain’s banking and insurance market for years, opening up an array of opportunities for buyers keen to gain their first foot-hold in the UK.
Long-awaited plans to sell off a large chunk of assets owned by Lloyds Banking Group and Royal Bank of Scotland will scale back the powerful presence of these banks as each is forced to sacrifice a significant proportion of their core banking operations.
The break-up is intended to restore competition in an industry that has severely contracted as a result of consolidation and failures during the financial crisis.
“The evolution to a more competitive retail banking environment should come sooner rather than later,” said Neil Tomlinson, head of retail banking at Deloitte. “Customers should get more choice as both existing and new banks will have to up their game.”
Change is far from imminent, however. The government has given the banks four years to shrink their businesses and assets are unlikely to be put on the block in the near future.
Eventual buyers could include international banks, such as BBVA and NAB, as well as private equity firms and other new entrants such as Virgin Money, Tesco and Metro, the US bank.
Banks that already have a large presence in the UK, including HSBC and Barclays, will be blocked from the bidding process. Santander is only likely to be free to bid for RBS’s business banking assets.
For new entrants this is a chance to capitalise on the price Lloyds and RBS are having to pay for their part in the banking meltdown.
The pain may be more acute for RBS, which is 70 per cent owned by the state.
The bank must sell 318 branches, including the RBS network in England and Wales and NatWest in Scotland, and give up its direct small business customers.
RBS will also lose its insurance businesses, Direct Line, Churchill and Greenflag. It said these were more likely to be floated than sold to an existing player.
“The question for investors is do they give their money for new equity to a company such as Zurich to go and buy Direct Line, or do they just buy new equity in a large, well-run company with a great brand,” asked one analyst. “I think investors will prefer to buy it through an IPO [initial public offering].”
The disposals far exceed the penalties RBS had expected for state aid.
RBS’s thriving debt capital market franchise will also be barred from growing beyond its fifth-place league table ranking last year, which Simon Maughan, an analyst at MF Global, said was more pernicious than the asset sales.
“At least when you have to sell a business you can draw a line under that. But how do you manage a business to be fifth?” said Mr Maughan.
Lloyds, meanwhile, will sell at least 600 branches, including its Cheltenham & Gloucester mortgage network, and must shrink its dominant share of current accounts and mortgages in the UK by about five percentage points.
The government hopes the sale of these businesses – plus the “good bank” of Northern Rock – will eventually plug the gap left by the disappearance of Alliance & Leicester and Bradford & Bingley into Santander.
However, analysts did not expect disposals to be under way until well into next year. Questions remain over how good a time this would be for new entrants to come into the UK.
“I don’t think we have a clue how profitable the UK retail banking market will be in 12 months’ time,” said one analyst. “It is a bit early to get excited.”
Buyers may want more certainty over how quickly margins can recover and how much additional pressure regulators will put on banks. They will also have to compete with established banks that have significant market share and cost-effective businesses.
