Announcing the plans for asset sales by Lloyds TSB, Northern Rock and Royal Bank of Scotland in early November, Chancellor of the Exchequer Alistair Darling promised the move would increase competition in the U.K.’s tight-knit retail banking sector.
He didn’t have much choice. Last year’s financial crisis required significant government rescue funds, and the European Union has given the U.K. four years to reduce the big bank’s market share.
Many banks that may want a presence in the country simply don’t have the cash to buy the banking bits the government wants to sell, and non-U.K. lenders that already have a foothold, such as Spain’s Banco Santander, are excluded in an effort to boost competition and attract new players. So the government is crossing its fingers that nonbanking firms in the U.K. will enter the fray.
Retail giant Tesco and Virgin Group’s U.K. financial services business, Virgin Money, are strong contenders. Their no-nonsense populist brands key into public disenchantment with larger banks, and their balance sheets are strong. Tesco Bank, an arm of the U.K.’s largest supermarket group, refused to comment on reports that it’s a likely bidder for the government assets, but it has made no secret of its ambitions to become a full-service retail bank and is currently testing in-store banking services at six stores.
A prompt acquisition by Tesco of one of the branch networks on the block would steal the march on Virgin Money. The financial services arm of Richard Branson’s business group, which made an unsuccessful bid for Northern Rock before its nationalization in 2008, applied for a banking license in October. Virgin Money chief executive Jayne-Anne Gadhia has meanwhile approached former Northern Rock chairman Bryan Sanderson to become a non-executive director of the proposed new bank. “We’re keeping an eye on U.K. banking assets in parallel with the license application, and yes we are interested in those of the government,” says Virgin Money’s head of media, Scott Mowbray.
Last year’s financial crisis threw the U.K.’s banking sector into disarray, but a wave of consolidation that was already well under way — including a series of takeovers of building societies, banks and mortgage providers — has seen Abbey National, Alliance and Leicester, Woolwich, HBOS and TSB (Trustee Savings Bank) merging with or being acquired by the larger Barclays, RBS, Lloyds and Santander.
For players entering the fray, the costs will be steep. “You need real scale to compete in this market,” says Chris Smith, financials analyst at Jefferies in London. For example, in October, after no foreign buyer stepped up for the mortgage and savings operations of Scottish banking group Standard Life, Barclays eventually paid £226 million ($367 million) for the business.
In a bid to prevent a repeat of the recent financial crisis, the EU has given the U.K. government four years to break up the three banking giants. With a general election set to happen in June and the RBS nationalization the most expensive bailout in history, Darling will hope that Tesco or Virgin moves sooner rather than later.
