No doubt which bank comes out worst (relatively speaking) from the eagerly awaited report from the Independent Commission on Banking, published on Monday…
That’s right it’s Lloyds Banking Group, which will probably have to sell even more of its branch network if it wishes to avoid a referral to those nasty competition regulators.
From the IBC report:
The Commission’s current view is that structural and behavioural changes are both necessary to improve conditions for competition in UK retail banking, not least to redress the increased concentration and loss of challengers as a result of the crisis. The planned LBG divestiture represents an opportunity for entry of a strong, effective challenger in the retail banking market. However, as currently structured, it is unlikely to give rise to a credible challenger. Substantially enhancing the LBG divestiture would make it more likely that the new institution would exert a competitive constraint on the large incumbent banks in the short term, and would reduce LBG’s market share. If a substantially enhanced divestiture does not result, there could be a strong case for the competition authorities to conduct a market investigation of the personal and SME banking markets in the UK.
(Nota bene: after the current enhanced divestitures, Lloyds will have a 25 per cent share of the personal current account market, 19 per cent of gross mortgage lending 21 per cent of SME banking).
And in more detail from page 122 of the report:
Moreover, the divestiture as currently structured has a weak balance sheet, which could pose significant difficulties. As a standalone institution, it would need to cope with a high ratio of loans to deposits, which would require it to raise substantial funding in order to finance the mortgage assets. This stems from HBOS’s high reliance on wholesale funding prior to the financial crisis.
However, it is now much more difficult to raise funding than it was in 2007, particularly for a small player without an established reputation. As a consequence of this imbalance, there is a serious prospect that the structure of the divestiture will be different from the 4.6% of PCAs and 19.2% of LBG’s mortgage assets set out in the state aid agreement – in particular that the mortgage assets will be scaled back.
Even if a third party is found to finance the funding gap, the divestiture seems likely to have a high loan-to-deposit ratio relative to its UK peers.
This picture suggests that the LBG divestiture would be unlikely to give rise to a strong challenger, at least in its early years. In addition, as currently constituted, the divestitures will leave the PCA and SME banking markets particularly concentrated, and with LBG in a uniquely strong position in retail banking. As a result, the Commission’s current view is that the planned LBG divestiture is insufficient and that it will have a limited effect on competition unless it is substantially enhanced.
Lloyds has already committed to selling 600 branches (4 .6 per cent of the market) and John Vickers, chair of the ICB, doesn’t define what “substantially enhancing” means in terms of numbers. Another 300 branches perhaps? Possibly. The IBC is recommending that Lloyds makes a big enough disposal to create a viable stand along business.
In summary, though most of the worse case scenario recommendations that the market was worried about have not been made. Yes, there’s a bit of extra cost here on the proposals to ring-fence retail banking operations and in promoting but not as much as the market feared.
As for capital, the Commission is recommending a 10 per cent equity baseline for 10 per cent but importantly it reckons this should become an international standard. Another positive for the UK banks
In any case this is an interim report that will probably be watered down by the time the full version appears in September. Even then, there’s no guarantee the Chancellor will listen to any of it.
Full report in the usual place.
Vickers urges banks to protect deposits – FT