Apocalypse now

The deal allowing Lloyds TSB to buy HBOS marks the culmination of perhaps the most momentous week in recent financial history. Christine Toner reports

The UK mortgage market Thas a new Goliath. In what will go down as one of the most important years in financial history, banking giant HBOS has been bought by competitor Lloyds TSB, giving the new lender a market share of over 30%.
Following days of shocking announcements from the US and stock market-shattering turbulence across the world, the UK’s biggest and most important lender entered into advanced talks with Lloyds TSB. At 7am on Thursday September 18 it was ann-ounced that Lloyds TSB had bought HBOS for £12.2bn.
The deal means Lloyds TSB valued HBOS shares at 232p each. The terms of the deal state that HBOS shareholders will receive 0.83 Lloyds TSB shares for each HBOS share they hold.
Lloyds TSB said the new entity will continue to use HBOS’ headquarters in Scotland and would focus on maintaining jobs north of the border.
It has been confirmed that Lloyds TSB chief executive Eric Daniels will head up the new super bank but as Mortgage Strategy went to press the fate of HBOS chief executive Andy Hornby was unclear.
As part of the agreement, it has been announced that combining the lenders’ networks and back office systems could deliver significant cost savings. This could mean the elimination of branch duplication. HBOS currently has 1,100 branches and Lloyds TSB 1,900.
The government has admitted its involvement in the deal, with Prime Minister Gordon Brown personally taking part in negotiations.
To push the merger through it will overrule the Office of Fair Trading, which would normally refer such cases to the Competition Commission. The latter launches an investigation when larger companies gain more than 25% market share and mergers appear likely to substantially reduce competition in one or more domestic markets – but not this time.
Following the stock market chaos caused by the collapse of US firm Lehman Brothers, the government is going out of its way to ease worries here. While Lloyds TSB and HBOS are solvent, their shares took a battering following the news from across the pond. At one point HBOS shares were down 32% to just 88p.
With the US in turmoil and the run on Northern Rock just a year ago still fresh in the public’s memory, Brown has taken unprecedented steps to convince voters that HBOS would not go the same way.
The acquisition will give the new lender what some would call an unfair advantage with a market share that breaks the usual rules. But the government is more focussed on promoting financial stability than competition so protestors’ complaints are likely to fall on deaf ears.
It is unlikely the move will be welcomed with anything but understanding by the mortgage industry.
“While unusual, we understand the rationale behind the government’s decision to override the OFT,” says Richard Roberts, property consultant at The Route City Wealth Club. “Although it could reduce competition in the sector, avoiding the potential for further volatility in the market is the lesser of two evils.
“Given the uncertainty surrounding HBOS over the past few days and the alarming depression of its share value, the stability that an HBOS and Lloyds TSB merger brings is desperately needed. HBOS was the UK’s largest lender and its collapse would have far greater repercussions for the industry than the downfalls of NR or Lehmans.”
Tim Fletcher, sales and marketing director at financial analyst Baseline Capital, agrees the government had to waive the usual rules to curtail speculation surrounding HBOS. But he thinks it is possible action may be taken at a later date.
“If they do anything with regards to competition it might be a late referral that divests some of the merged entity’s assets,” he says.
While the acquisition is good news for the industry in terms of confidence and stability, it is bad news for many affected staff. Thousands of jobs could be lost due to the overlap of management and branch positions.
Some industry estimates suggest that jobs losses could be in the region of 40,000 although Lloyds TSB has been quick to deny this.
“We have to believe it will mean massive redundancies across branch networks and head office,” says Fletcher. “There will have to be cuts to reduce costs to correct whatever issues HBOS has.”
And it’s not just staff numbers facing the chop. Because of the similarities between the lenders’ offerings, it is likely some of their mortgage products will be culled too.
“This will have huge implications for the industry,” says Brian Murphy, head of lending at Mortgage Advice Bureau. “One key area will be the removal of an element of price competition in the market. It is highly un-likely that products from both brands will continue in the long term.”
Lloyds TSB has claimed there are no plans to make changes to any of the brands but says it is still early days.
But Roger Morris, managing director of em-financial, told Mortgage Strategy Online’s sister website Mortgagedistributor.co.uk that he remains optimistic about the move.
“Once things have settled down, Lloyds TSB will look at the different packager and broker brands and what they have to offer,” he says. “Self-cert has never been a negative issue with Cheltenham & Gloucester – it is one of the founders and visionaries of the self-cert market.”
Steven Marks, lending executive at Newcastle, agrees it will be interesting to see how the merger affects the lenders’ offerings.
“There are the immediate issues of how they will bring together various brands, what influence the takeover will have with such a large market share and what rationalisation takes place,” he says. “But the alternative scenario of another possible bank failure was too awful to contemplate, so this must be for the good of the financial system.”
But it’s not just the question of how the merger will work internally that has the industry puzzled. Questions are also being raised about what it will mean for the rest of the market.
“It raises the issue of what style and structure do we want for the future mortgage market,” says Peter Williams, executive director of the Intermediary Mortgage Lenders Association. “What will the merger mean in relation to the Crosby report? How will it affect liquidity? What will its impact be on specialist lenders?
“At the moment nothing much is being done to help the specialist sector. We have government activity surrounding big lenders but nothing for the specialists.
“They are smaller players but they have always been innovative and creative,” he adds. “Most of the larger lenders including HBOS have followed them into this market.
“There are efforts to secure major institutions but nothing regarding opening up funding streams for specialists. I’m struck by how uneven the approach is.”
The merger comes in a month of unprecedented economic crisis. It began with the launch of the government’s mortgage rescue plan. A week later the US Federal Reserve and government nationalised giant lenders Fannie Mae and Freddie Mac. Just 48 hours passed before Lehmans, one of the biggest banks on Wall Street, filed for bankruptcy.
Bank of America bought Lehmans’ Wall Street rival Merrill Lynch after the US government offered favourable terms in an attempt to prevent the same thing happening again, while in London and across the globe the stock markets took a major hit.
The news that Lloyds TSB was practically encouraged to buy HBOS with government backing and no complaints from the Competition Commission is the latest in a long line of shocks.
Peter Mounty, Mortgage Strategy columnist and director of communications at Plus UK, was head of communications at C&G.
He says Lloyds TSB has struck lucky with the deal.
“From Lloyds TSB’s perspective it will be picking up a sound business that has been artificially taken to the wall,” he says.
“The underlying strengths of HBOS would have seen it through the storm but alarmist speculation has brought its share price down.
“I imagine Lloyds TSB can’t believe its luck,” he adds. “It must think it has died and gone to heaven. It has picked up a prime acquisition with the backing of the government and in the face of competition rules. I imagine its directors are totting up their bonuses because it will have been a good year for them.”
Matthew Wyles, non-retail director of Nationwide, agrees that Lloyds TSB has done well. Although no stranger to takeovers since his firm recently acquired the Cheshire and the Derbyshire, he says HBOS shareholders and consumers will lose out.
“As with the Banco Santander and Alliance & Leicester transaction, this is a fantastic deal for the acquirer,” says Wyles. “Lloyds TSB is taking out a major competitor at an incredibly low price. Better still, it has circumvented anti-competitive issues, which in a functional market would have made the deal impossible.
“This is pretty poor news for HBOS shareholders and consumers. The new super bank will have limited scope to grow its share of the mortgage and current account markets because it is too big already. This will inevitably reduce competition and self-evidently customer choice.
“If you combine the effect of this huge takeover with the other consolidations taking place, the negative implications for consumers can only become more marked,” he adds.
“But we should be clear – this deal had to happen and the regulators have shown commendable decisiveness and pragmatism in dealing so rapidly with a real crisis.”
While the drop in HBOS shares and its rumoured struggles have come as a surprise to the industry, it is not the first time the spectre of liquidity problems have haunted the lender.
In March the Financial Services Authority launched an investigation into share trading after rumours that HBOS had asked the Bank of England for emergency funding. Its shares plummeted almost 18% to 398p as rumours emerged of problems at the bank. Both HBOS and the BoE dismissed them as rubbish, leading to allegations of market manipulation.
An FSA spokeswoman refused to comment on the acquisition but claims it is a separate case to the one brought up in March.
“We closed that investigation on August 1,” she says.
When the investigation closed the FSA concluded that foul play was afoot but could find no firm evidence.
“There is no doubt false and damaging rumours were circulating about HBOS on 19 March and these had some impact on its share price,” it said.
“Despite the likelihood that the rumours contributed to the fall in the share price, the FSA has not uncovered evidence that they were spread as part of a concerted attempt to profit by manipulating the price.”
Last week’s news will lead to speculation that at the time there was more to the rumours than met the eye.
It is clear that the Lloyds TSB/ HBOS merger will go down in history as a pivotal moment in the mortgage market’s development.
“It is incredible to think that HBOS needed to be rescued,” says Newcastle’s Marks. “It is yet another sad turn of events in a week and year that is never going to be forgotten.” l
Takeover history of two banking leviathans
Brokers will end up losing a major brand
Andrew Montlake is partner at Cobalt Capital Like many in the industry I have been glued to the screen watching the news about HBOS and Lloyds TSB with avid interest. I have said before that we are in the midst of historic times but I’m not sure many of us realised how historic.
Banks that survived the 1929 Wall Street Crash have not made it through the credit crunch. AIG, the largest insurance company in the world, needed a $85bn loan from the US government not to join them.
Now we have the UK’s biggest mortgage lender being forced to merge with Lloyds TSB – what is the world coming to? This will create a massive banking institution worth around £30bn, with a huge slice of the mortgage and savings pie.
This brings with it several issues, not least competition questions given the sheer size of market share it will hold in these areas. It is believed that the government worked on a way around these issues, which involved special measures being put in place in the interests of the greater economic good.
Prime Minister Gordon Brown could not afford another Northern Rock on his hands, so has been directly involved in negotiations.
“The deal was in safe hands then,” said a leading wag in our office.
It is a shame to see this happen from the point of view of consumer choice and its possible effects on jobs. I believe HBOS is fundamentally strong and had good managers running it at all levels. In July it raised £4bn and still made a £950m profit in the first half of 2008.
But current conditions and intense media speculation – HBOS has been hounded unfairly for a while – plus reportedly shadowy speculative short seller groups have led to its share prices rising and falling like a dog on heat.
It seems to have been forced into this situation, although it may prove to be the best, if only, solution. The merger will calm things down considerably.
The effect on our industry will be profound as the landscape changes dramatically once again. Consumers and brokers will end up losing one or more big brands with good lending appetites. Some excellent staff may be displaced. And the new entity may come under pressure to reduce its combined market share, leading to more unattractive pricing in the short term when we need more products most.
But it may be a triumph in the long run. We could see a larger, more stable lender with some of the best staff in the business and an integrated IT system that is quick and efficient. Perhaps it will even have the appetite to become more innovative with certain brands that will no longer represent a major part of its lending book.
We must not let customers or the media panic, as that is in nobody’s interests. What is indisputable is that HBOS, both pre and post-takeover, was and will remain massively important to our industry.

How industry pundits greeted the takeover

Sue Read is an associate at Moneywatch Finance

I’ve said this for years but eventually we’ll end up with one enormous bank with a great long list of initials. I know that sounds flippant but on a more serious note I would ask the new bank to simply call itself the Lloyds Group or something equally straightforward. It is confusing to have to explain to the public the intricate connections between all the names we have to discuss with them.
It’s also confusing to explain that one brand deals with prime residential mortgages, one arm deals with buy-to-let, another with sub-prime and so on. Lenders can keep these operations running on a separate basis – brokers will know where to send applications – but it would make life much simpler for clients with just one name. I’m sure Treating Customers Fairly could be brought into that argument somewhere.

Melanie Bien is director at Savills Private Finance

If ever evidence was required that the credit crunch has got serious, the scalp of our biggest, seemingly unassailable mortgage lender is it. In just over a year, HBOS has fallen from grace in an astounding way. Whether it is fair that it now finds itself in this position, swallowed up by a smaller rival, is debatable but it goes to show that the crunch is capable of providing real shocks. This is the ultimate shock and makes one think that anything is possible.

Lynsey Sweales is director of The Money Centre

The speed with which the takeover took place and the involvement of the government sends out the right message to the public as finally it shows we are capable of quick and decisive action. Some are unhappy that it happened but in the current economic climate it was too risky for HBOS to have taken any other route.
HBOS markets itself under many different brands including Birmingham Midshires, so it is extremely likely that each of these brands will have their products reviewed by Lloyds and possibly changed.
We operate in the buy-to-let market and are naturally concerned that the competitive rates currently available through BM Solutions could be withdrawn and put in line with Lloyds TSB’s not so competitive rates, although we hear this won’t happen.
With this in mind, it’s possible the market may get a bit bumpy again but this is better than the freefall that could have happened if HBOS had not taken the takeover route.

Michael Curran is broker at About Mortgages

The news is being greeted by some like it is the end of the world. I agree that 40,000 potential job losses are bad news but not as bad as HBOS failing.
I am aware of the downsides but there are some positives too – Cheltenham & Gloucester could learn a lot from the newly acquired brands about service to brokers and customers.
This is a chance for a financially stronger, leaner and more confident group to exploit HBOS’ mortgage distribution and talent to further encourage liquidity by seeking to maximise that 30% market share. Even if it only pursues an aggressive retention strategy, surely it will mean others having to fight harder to make a dent in that 30%.
Even LTSB-HBOS could not take all those customers for granted and become an unwieldy, uncompetitive behemoth, an easy target for ambitious smaller lenders, could it?

Alan Cleary is managing director of edeus

The merger of these two giants will be a significant blow for competition but the stability of our financial markets must be protected at any cost. Stability trumps everything and this may be the trigger that gets the government and the Bank of England to take decisive action.

Sue Cox is head of intermediary sales at Beacon Mortgage Packaging

I can’t imagine the merger will make a massive difference to the product offerings of the various trading identities within HBOS and Lloyds TSB.
Over the longer term there may be consolidation but it is too early to hazard a guess as to how things will pan out and what the impact on the industry will be.

Takeover History of two banking leviathans


HBOS

The Bank of Scotland is the UK’s oldest commercial bank, founded by a Scottish Act of Parliament in 1695. Halifax was founded in 1853 as the Halifax Permanent Benefit Building and Investment Society, which demutualised in 1997 to become a plc.
The merger of the BoS and Halifax occurred in 2001 during a wave of consolidation in the banking market that began in the late 1990s. BoS played a key role in the process by launching a hostile takeover bid for NatWest that failed, with a rival offer from the Royal Bank of Scotland taking the prize. It was considering a merger with Abbey National when Halifax approached it. They merged, creating the fifth largest UK bank by market capitalisation.
In 2006, HBOS secured the passing of the HBOS Group Reorganisation Act 2006, a private Act of Parliament allowing the group to operate with a simplified structure. The Act allowed HBOS to make BoS a public limited company, BoS plc, which became its principal banking subsidiary. Halifax plc transferred to BoS plc, although the brand name was retained. The provisions in the Act were implemented on September 17 2007.

Lloyds TSB

Lloyds TSB was created in 1995 when Lloyds Bank and the Trustee Savings Bank agreed to merge their operations, creating the second largest UK bank by market capitalisation after HSBC Holdings and the largest by market share.
Lloyds Bank was one of the oldest in the UK, founded by John Taylor and Sampson Lloyd in Birmingham in 1765. Through a series of mergers Lloyds emerged to become one of the UK’s biggest banks.
The TSB can trace its roots back to the first savings bank founded by Henry Duncan in Ruthwell, Dumfriesshire in 1810.
In June 1999, TSB and Lloyds Bank branches in England and Wales were rebranded Lloyds TSB. Scottish branches were rebranded Lloyds TSB Scotland, which now has branches stretching from the Northern Isles to the Mull of Galloway.
In 2000, the group acquired Scottish Widows in a deal worth £7bn. This made the group the second largest provider of life assurance and pensions in the UK after the Prudential.
In September that year, Lloyds TSB purchased Chartered Trust from the Standard Chartered Bank for £627m to form its Asset Finance Division, which provides motor, retail and personal finance under the trading name Black Horse.
Lloyds TSB made a takeover bid for Abbey National in 2001, although the Competition Commission rejected it.