How about this for a great summer sizzler? The UK government sells its 9.1% in Lloyds Banking Group within the stated schedule of 2016–17, coinciding with the departure of Antonio Horta Osorio for pastures new. There’s already been some chatter about how long the group CEO will hang on and I gather some institutional shareholders are keen for the board to accelerate succession planning.
So let’s assume there’s a pending vacancy in the corner office. But then the group goes on to settle legacy litigation issues; the PPI claims deadline passes; simplification targets (branch closures, staff cuts, £1.4bn in run-rate savings by end-2017, 30% reduction of non-branch property portfolio by end-2018) look like they’re on track, and Lloyds adjusts its business strategy to suit the low growth, low interest-rate (steady-state following Brexit uncertainty?) environment in the UK.
What then? Simple: the group becomes subject to an audacious swoop from a Chinese bank keen to establish a commercial, retail and consumer base in the UK. I picked up some gossip about this the other day and was rather taken by it. Lloyds’ corporate affairs folks said they don’t comment on speculation, a predictable but I guess reasonable response.
On the potentially sensitive political issue a Chinese bank takeover might present to the British government, if the new administration continues the same (alas rather toadying) approach towards China adopted by former British finance minister George Osborne, a takeover is likely to be seen as a positive sign. And a sign that would certainly a tick a lot of political boxes around non-UK commitment to the UK in a highly uncertain Brexit scenario. And one that is likely to be welcomed if it led to increased inward investment from China.
Like many other banks, Lloyds Bank’s share price has been battered: it’s down around 21.5% since the beginning of the year and close to 30% in the past 12 months. That would cheapen any takeover bid, but what would suitors be getting for their money?
Using the group’s own info: 30m customers; the UK’s leading provider of current accounts, savings, personal loans, credit cards and mortgages; lending relationships with one in four first-time buyers who complete in the UK; 11m online banking users; over 21m savings customers with over £200bn in retail savings deposits; around 26,000 corporate customers; and over a million SME customers. Not bad.
On the numbers, the group reported a doubling year-on-year of statutory profit in the first half of 2016 to £2.5bn (albeit driven by a big reduction in conduct charges and gains from the sale of its stake in Visa Europe rather than an improvement in cash generation from the business), strong capital generation and progress on its strategic initiatives.
On the downside, analysts point to the need to push cost-saving efforts hard and note the group’s susceptibility to higher loan losses in a cyclical downturn deriving from expansion of areas like consumer credit. And of course the pressure on margins and the difficulty of operating a bank profitably in a zero interest-rate environment. But ultimately taking over a bank of this stature would be a case of positioning for the future. And if you’re going to do it, it’s probably better to do it using the cover of uncertainty while you get your ducks in row ahead of an economic upturn.
You’d imagine that any interest would come from either Bank of China or ICBC rather than the likes of Fosun or Haitong, which are playing in smaller waters. Fosun took over German private bank Hauck & Aufhaeuser in 2015 and had a tilt at BHF Kleinwort Benson before losing out to Societe Generale. Haitong acquired failed Banco Espirito Santo’s investment bank and was one of the bidders interested in Novo Banco. It’s known to want to do bolt-on acquisitions in European asset management and establish a presence in the US.
The Big Two are certainly looking to expand in Europe. ICBC acquired a controlling stake in Standard Bank’s London-based global markets business last year and ICBC Standard Bank continues to be headquartered in London. Both are expanding their London corporate finance, lending and capital markets syndication and underwriting platforms.
Eyeing up Lloyds Bank would obviously represent a major step-change in their ambitions. But then again the quantum of that step-change will need to be viewed against the imperative to create a flow of diversified revenue to counter-balance a cooling economy in China and how quickly they want to realise their ambitions to banking superstardom.
So is the story too far-fetched? Wildly speculative? Probably so on both counts. But could you discount it totally? That’s the question …
