Lloyds steps up battle for high-street dominance

Over-banked Britain: merger highlights nation-wide scrap for rich pickings in financial services

JOHN EISENHAMMER

Financial Editor

The battle for size in the fiercely competitive UK retail banking sector escalated sharply yesterday with the announcement of Lloyds' planned merger with the TSB.

The combined group will have over 3,000 branches and a workforce of 85,000, transforming it into the country's biggest retail banking conglomerate. Insiders warned of significant branch closures and job losses to reap the necessary efficiency gains from the Lloyds TSB Group plc, as it will be known.

The merger calculations are said to be based on an ambitious cost-savings target of pounds 2bn over several years, which would require anual savings in the order of pounds 400m.

The deal will give the six-member executive TSB board a potential pounds 10m in share-option profits and special dividend payments.

As the TSB share price rocketed, the board was showing an immediate pounds 7.4m profit last night. This is based on share options already exercisable, together with the expected proceeds of the special dividend of 68p a share, which will be worth pounds 1.8m to them.

The executives also have share options than can be exercised from next month until the end of the decade, which were showing a paper gain yesterday of a further pounds 2.6m. Sir Nicholas Goodison, TSB chairman, stands to collect almost pounds 2m, and Peter Ellwood, the chief executive, pounds 1.7m.

TSB shares rose 79p to 353p, and Lloyds rose by 21p to 726p, as the sector gave a mixed reaction to the potential competitive threat from a new banking giant.

Sir Brian Pitman, Lloyds' chief executive, has been issuing dire predictions about the way the UK banking industry must go. Over-capacity has been increasing pressure for job cuts and consolidation, as the big retail banks and building societies crowd one another's patches, seeking to turn themselves into retail financial services conglomerates offering lending, pensions, insurance, and investment and savings products. High street banks have cut more than 60,000 jobs in the past five years.

There was little doubt in Sir Brian's mind that size was essential for success. The broadest scope of outlets is needed to feed the increasingly varied range of financial products to customers. In particular, the chance to earn good profits in the mortgage lending business, where margins are under considerable pressure, is linked to achieving big volumes.

The Halifax-Leeds merger, and Abbey National's purchase of National & Provincial, point up that others have drawn similar conclusions. Lloyds' take-over of Cheltenham & Gloucester building society this year showed where Sir Brian's ambitions were directed.

Yesterday's announcement with the TSB intensifies the competitive heat on those players in the building society movement, notably the Woolwich and Alliance & Leicester, that aspire to the big financial services league, but have yet to divulge their strategies.

The driving force behind Lloyds' strategy is mortgages, which the bank wants to grow into its biggest product. The acquisition of C & G gave Lloyds some 6 per cent of the UK housing loan market; TSB will bring its share up to 9 per cent, behind Halifax-Leeds and Abbey National-N&P. Similarly, Lloyds wants the outlets and the increased customer base to strengthen its life business.

As a means to these ends, there is hardly a better strategic fit for Lloyds than the TSB, which, with only minimal corporate operations, is essentially a retail bank. Its geographical focus is in the north of England and Scotland, against Lloyds' southern bias. Lloyds has a more upmarket image, while TSB is very "studenty" and blue-collar.

Within the merged group, this offers considerable potential for branded marketing, which Sir Brian is known to be much interested in, with C & G as the main mortgage label, TSB for simple banking products, and Lloyds retaining the mantle of the more sophisticated service and products.

The comparative lack of overlap, and the fact the merger would make little difference to the highly sensitive small business lending market, are reasons why Lloyds stands more of a chance of escaping a referral to the Monopolies and Mergers Commission of the sort that terminated the ill-fated bid for Midland Bank in 1992.

But the merger still offers considerable scope for efficiency savings. Perhaps as many as 500 of the 3,000 branches will close, and the 90,000 combined workforce could drop by 20 per cent over several years. Equal scope for efficiency gains exists in the other big areas of fixed costs - the two head offices and investments in information technology. By bringing together cheque-clearing, processing and money-transmission mechanisms, Lloyds TSB could find substantial synergies.

For the TSB, the merger brings to an end a long period of prevarication. Too small to make its mark, it toyed with buying a building society, but never took the final step. However much it cut its costs, its underlying business struggled to gain momentum.

But there is a reward for effort for Mr Ellwood, TSB's chief executive, who, by landing the crucial job of integrating the dominant retail side of the business, looks well positioned to take over from Sir Brian as the head of Britain's planned banking leviathan.

Banking cutbacks

Job losses 1990-end '95

Barclays 21,000

Lloyds 15,000

Midland 9,000

NatWest 23,000

TSB 9,000

Branch closures 1974-94

1974 14,908

1984 14,058

1989 13,131

1994 10,724