Lloyds TSB To Gobble Up HBOS

There's so much happening in the financial markets at the moment that it's hard to keep up - saw this article today and thought i'd add it here.. Although even since this article was published the terms of the Lloyds/HBOS deal have been announced.

By Stuart J Watson | 17 September 2008

I’ve lost count of the number of times I’ve had to pick my jaw off the floor this week. After the news of the collapse of Lehman Brothers, the takeover of Merrill Lynch and the bail out of AIG, attention today shifted to banks here in the UK, and in particular HBOS (LSE: HBOS).

Of the big five UK banks, HBOS was the one investors were most concerned about. That’s because it gets the greatest share of its funding from the money markets rather than the more traditional method of customer savings.

At the start of the week HBOS shares were around 280p. On both Monday and Tuesday its share price slumped some 40% during the day only to claw back much of its losses by the close of trading.

Wobbly Wednesday
Wednesday morning’s events were unbelievable. Shortly after the markets opened at 8am HBOS shares were around 200p. By 9am they had sunk to 88p as rumours circulated that it may have difficulty renewing some of its funding.

Then an item appeared on Robert Peston’s blog (he’s the business editor of the BBC who also broke the Northern Rock story) saying that Lloyds TSB (LSE: LLOY) and HBOS were in advanced merger talks which would lead to a takeover of HBOS at close to 300p per share.

HBOS shares rallied back to around 200p within half an hour or so. Finally, at 1:25pm HBOS confirmed that was in talks with Lloyds TSB but gave no details of what form the deal might take. A further announcement with full details could come either later today or first thing tomorrow.

Your money’s safe
The first thing to stress is that if you’ve got money with HBOS then it should be safe. Not only if the combination of Lloyds TSB and HBOS much better equipped to withstand the current financial turmoil, there is a compensation scheme in place that guarantees the first £35,000 of your savings (more details in this article).

That said, it’s highly unlikely that the compensation scheme would ever be required for a bank the size of HBOS as, quite simply, the government cannot afford for it to fail due to the impact that it would have on the economy. For example, HBOS holds around £150bn in savers’ money at the moment, which is around 15% of the all the money held in UK savings accounts.

So a preferable course of action is for HBOS to be ushered into a safe harbour of another bank as a precautionary measure. Indeed, we are being told that Gordon Brown himself has encouraged this merger.

A dominant UK bank
In terms of assets, the combination of Lloyds TSB and HBOS will only be the fourth largest UK bank. It will have around £1 trillion in assets whereas Barclays (£1.3 trillion), HSBC (£1.4 trillion) and Royal Bank of Scotland (£1.8 trillion) are all quite a big larger.

However, the operations of Lloyds TSB and HBOS are predominantly in the UK while the other three are far more international in nature. Lloyds TSB has £65bn in customer savings, so the combination of the two firms will be the market leader in the UK by a considerable distance in the savings market. Indeed, HBOS on its own is already the largest player.

In terms of mortgages, HBOS has 20% of the mortgage and Lloyds TSB has around 10%. The combination of the two, with mortgages totalling some £350 billion, will be three times larger than their nearest competitors Abbey and Nationwide, each of which have around 10% of the market.

The combined firm will also dominate personal current accounts with a 33% market share, twice the size of the next largest player.

Normally such large market shares would attract the wrath of the competition authorities but the government is apparently going to waive any deal through on the grounds that financial stability is more important. Whether disposals will have to be made at a later date, once the economic waters are calmer, remains to be seen.

Of the two, from a customer point of view, HBOS is considerably more competitive and has been collecting lots of new business in recent years with attractive rates on current accounts, savings and credit cards. It would be a shame if this was a casualty of any deal. The rates paid on Lloyds TSB savings accounts are pretty dreadful and it seems obsessed with short-term bonuses.

On the jobs front, both companies employ around 70,000 people and, sadly, there could be a considerable number of redundancies. Lloyds TSB has around 2,000 branches while HBOS has about 1,300 and there is bound to be a significant overlap in many areas. Indeed there have already been estimates as high as 40,000 job losses and 1,000 branch closures, should the deal go ahead.

In closing...
There is a nasty old stench around many aspects of this merger.

The way HBOS shares declined first thing this morning has once again raised the question as to how much involvement hedge funds had in this process and whether malicious rumours were spread enabling some people to illegally profit from the decline. We could see more regulation of these activities in the near future although it will be very difficult to strike a correct balance.

The fact that news of the takeover came via a blog, rather than through proper channels, raises serious questions about the way the UK stock market conducts itself. Robert Peston obviously has excellent connections but it was several hours before any official announcement was made, during which time investors were in limbo. The fact that many online share dealing sites were seemingly out of action today compounded the problem.

The disregard of competition rules, if this rumour turns out to be true, is also a big concern not least for the large number of job cuts that could that result.

The only real positive is that this merger is arguably the least worst option for the economy at this time. A wounded HBOS is something the financial system can ill afford.