A couple of months from now the Independent Committee on Banking will reveal the range of options it is considering to promote “financial stability and competition” in the UK banking sector.
But will the ICB opt for a break-up or a shake-up? That’s the question Rohith Chandra-Rajan, banks analyst at BarCap, has been debating. And his answer? Shake-up.
First of all making Britain’s bank sell their “casino” banking operations would, he believes, do little to improve financial stability.
While we find little empirical evidence that splitting investment and retail banking would improve financial stability, if enforced we believe it could push group RoEs down to 10-11% for RBS and LBG and 12-13% for Standard Chartered, but see HSBC largely unchanged at c16%. We believe that the more likely means of improving financial stability is through increased capital and liquidity requirements, which we estimate would still see HSBC with surplus capital and Standard Chartered adequately capitalized but marginally reduce RoEs for RBS and LBG.
Which brings to matters domestic.
While there has been much comment on the ICB’s remit to promote financial stability, specifically splitting retail and investment banking activities, we believe that high market shares and ongoing concern about a lack of competitiveness in key retail and commercial banking products mean that there is a substantial risk of remedial action in this area.
And it’s not difficult to see why.
For example, even after Lloyds has divested a big chunk of its branch network (it has to sell 600 branches covering at least 43 per cent of the UK population to comply with EU state aid rules) it will still be the dominant force in current accounts, credit cards and mortgages.
Current accounts and SME lending have, of course, attracted significant attention from UK competition authorities over the years. As such, Rajan says it is a fair bet these two areas will be the the focus for the ICB.
And if you want greater competition there are only a few ways to do it — if you don’t want to take the nuclear option and force Lloyds to sell HBOS.
While there are various ways to deal with competition, further divestments are among the most straightforward. The question then is what is the right market share to target? Historically, 25% was a benchmark loosely adopted in the UK, and under this scenario no further action would need to be taken as both Lloyds and RBS market shares are 25% or below. An alternative might be to require a further 5% reduction, taking market shares down to c20%. A further option would be to narrow the gap with other close competitors, improving competition by reducing the dominance of the top player.
Now, if Lloyds were forced to lower its share of current accounts to 20 per cent (surely a possible outcome), Rajan reckons this could result in a 2012 earnings downgrade of up to 23 per cent.
We estimate EC-required divestments will reduce 2012E pre-tax earnings by 2% for RBS but 12% for LBG. With the RBS transaction already agreed and its financial impact disclosed, we believe that this should already be factored into consensus estimates. However, LBG has said little on the subject and we believe future announcements are likely to result in consensus downgrades. Further divestments over those required by the EC could result in an overall 23% earnings downgrade for LBG, while we estimate that the negative impact at RBS could be as little as 2%
Which would make selling HM Treasury’s stake in Lloyds a tiny bit more difficult.
Much more in the usual place.
Related links:
Next up for Barclays – a bad bank? – FT Alphaville
UK mortgages, and the bank lending blame game – FT Alphaville
Call for evidence – ICB