The planned sale of 632 UK bank branches by Lloyds Banking Group to the Co-operative Banking Group, which already owns the Co-op Bank, Britannia building society and the online Smile banking service, has collapsed. The failure to triple Co-op’s bank branch network to 974, thereby increasing its share of the UK retail banking market from 2% to 7% by adding 4.8 million customers from Lloyds BG, is a big set back to the government’s plans to introduce more competition. It will no doubt also further stymie its stalled funding for lending scheme (FLS), which was intended to help get loans to small UK firms but has largely been used by the established ‘big four’ UK banks - RBS, HSBC, Lloyds BG and Barclays - to finance mortgages instead or loans to larger firms that don’t need it.
The failure of the long-planned but troubled ‘Project Verde’ sale of part of Lloyds BG’s customer base and branches leaves the state-backed bank, which is 40% owned by the government following a 2008 bailout, pursuing a floatation strategy instead. Lloyds BG will now seek to sell the 632 branches and 4.8 million associated retail and small-to-medium sized (SME) business customers, as a standalone UK bank instead via an initial public offering (IPO), which is expected in Q1 2014. The standalone bank will be known as TSB, an old brand of the Lloyds Banking Group, and is expected to fetch £1.5bn, double the discount price Co-op agreed last year. It will still, however, be reliant on Lloyds BG for its back office systems and IT.
The Project Verde sell-off was being demanded by the EU as a 'quid pro quo' for the state aid Lloyds BG received when it took over the HBOS bank in the teeth of the 2008 financial crisis, subsequently requiring a taxpayer-funded bailout to survive when the scale of its acquisition’s bad loan book became clear.
The Co-op Banking Group has blamed the failure of Project Verde, as it was known, on the continued economic downturn in the UK, large integration costs, the low interest rate environment which is negative for retail banks and loans, as well as the tougher regulatory environment which is increasing the cost of doing business. The Group lost £662m last month, largely as a result of its earlier acquisition of Britannia building society. The similarly mutually-owned Co-op would likely also have had to raise £1bn to improve its capital base commensurate with its expanded size if the sale had gone through - it is a challenge for member-owned organisations to raise these kind of funds.
The difficulty of integrating the different, siloed core banking systems together of the separate banking groups to create a new, unified bigger UK bank is also likely to have been a key obstacle to the deal. A separate deal to sell off 300 RBS bank branches and its customers to Santander, also as a ‘quid pro quo’ for receiving state aid, fell through last year over similar concerns that the technological integration challenge would be too high, especially in a time of low growth.
According to Peter Marks, the out-going chairman of the Co-op in a statement released by the bank, “the decision reflects the impact of the current economic environment, the worsening outlook for growth, and the increasing regulatory requirements on the financial services sector in general”.
Struggling UK Growth
The worsening outlook for the UK economy described by Marks was somewhat refuted earlier this week when the Q1 gross domestic product (GDP) estimate showed 0.3% growth, instead of the widely expected retrenchment into a ‘triple-dip’ recession. But there is no doubt that the country is presently flat-lining in terms of its recovery from the 2008 crash, with overall GDP still less than it was before the downturn, sparking a fierce debate about the role of banks and the government in supporting a rebound.
In this context the UK government could certainly do with some newcomers to the retail and commercial banking sector to help SMEs and get loans flowing again to kick-start an economic recovery. The ‘big four’ UK banks have been singularly unwilling to do this as they are under conflicting pressure to build up their capital bases for Basel III and other new regulations. The extension of the funding for lending scheme (FLS) until 2015 earlier this week is just one instance of the government’s desperation to get the economy moving again, but structural market alterations are likely to have a much bigger impact than any policy initiative.
Many in the UK are now calling for the establishment of smaller regional banks specifically designed to help SMEs, along the lines of the German ‘landesbanks’ - a high profile advocate for this idea being the new Archbishop of Canterbury, Justin Welby. The leader of the Church of England, an ex-financier and oil executive himself, suggested at the start of the week that a major UK bank should be refinanced and split into regional banks.
Reaction to the Failure of Project Verde
Commenting on the failure of Project Verde to get the green light, Bill Parker, CMO, GMC Software Technology, has given his initial thoughts on what this means for the Co-op and its customers: “A physical branch presence is important for customers. However, Co-op has decided that Project Verde is too expensive an overhead at this time," he said. "It’s still all about the customer experience though. With a minimal physical presence, the Co-op is putting added pressure on its online and mobile banking services as it continues to seek growth regardless.
"Co-op must ensure that services are 100% reliable," continued Parker. "As we saw yesterday with Nationwide's retail banking IT failure and the RBS ‘IT glitch’ last summer, any failure of service has severe consequences for customer trust."
Conversely, it was probably fears about precisely this potential to disrupt a smooth-running banking service and concerns about the technology integration challenge that scuppered the deal.