A flotation the most likely outcome for Lloyds Banking Branches?
When it is reported that Lloyds Banking Group is to dispose of 632 branches it’s important to be clear as to what that actually means.
The number of branches being sold need to result in a reduction in Lloyds Banking Group’s share of the current account market by 4.6 percent. These branches need to have average footfall, i.e. it can’t be the least successful branches, and they can’t be in the grottiest areas.
When the Information Memorandum (IM) is issued to potential purchasers it will contain a list of the branches. As Santander found out when they bought the 316 branches that Royal Bank of Scotland had to sell as a result of their receiving state funding, bank customers don’t like being sold by one bank to another like slaves in a market in Ancient Rome. There was a very vocal outcry and many customers decided to move their accounts elsewhere rather than be forced to become customers of Santander. What is not clear is what will happen if after the IM document comes out and customers find that they are to be sold if large numbers decide to move before the sale, thus diluting the reduction in market share by Lloyds Banking Group. Will Lloyds have to put more branches up or is the deal based on the impact of the market share reduction on the day that the IM is released or have Lloyds built in sufficient contingency in the number of branches they are selling to account for the defectors?
Whilst the talk is of selling the Lloyds TSB branches, there is more than just branches bundled in the offer.
For instance there is Intelligent Finance, the direct bank set up by Jim Spowart, which has no branches.
There is also the Cheltenham & Gloucester branches as well as the Lloyds TSB Scotland branches.
Certainly for the medium term it will have to include the infrastructure to support those branches – systems, data centres, processing centres, back office and staff. The buyer will need to bear in mind that whilst what will be retained will have been through a process of simplification and rationalisation as part of the integration of Lloyds TSB and Halifax, the parts that were never going to be retained e.g. C&G and IF will not have been through that process.
Once the process of acquiring this bundle of retail banking assets is complete there will have to be the multi-year programme of separating the purchase from the mother ship and, potentially, integrating it to the new owner, depending on who buys it and whether they have any infrastructure to integrate it to. This is clearly not a simple task and far more complex that the Santander acquisition of the RBS branches where not only was it one brand of branches but also Santander has a single, scaleable banking infrastructure already in place and experience of integrating many acquisitions across the globe.
Beyond the purchase of a large scale bank, the issue for any acquirer will be funding the bank. Above the potential £3-5bn price that the disposal will cost there is the question of funding. With the expected mix of branches there will be significantly more loans (largely because of the Cheltenham & Gloucester branches being included where mortgages are the dominant product) than there will be deposits and therefore the purchaser will be expected to need bridging finance which is estimated to be in the region of £10-15bn.
The questions for any potentiall acquirer are how can they put together the funding, will their investors be prepared to wait for the many years before such a venture can break even and how can they assemble a team with enough experience to be able to pull this off?
Of course there is already one team already in place who knows more about the branches, the systems, the funding requirements, the staff and the challenges involved in separation and integration, and that is the team that Lloyds Banking Group has put together to run Project Verde, the disposal of the 632 branches.
In its leader, Paul Pester, you have the experience of setting up Virgin Money, the experience of separating the Bradford & Bingley branches from the rest of the former building society, the experience of integrating Alliance & Leicester into Santander and, most recently, as Managing Director of Consumer Banking and Payments at Lloyds Banking Group.
His COO is Helen Rose. Helen has led the integration of the retail banks of Lloyds TSB and HBoS, so there can be few people who know any more about the challenges involved in that and the details of the systems and infrastructure required to achieve this. Her previous role in the Lloyds TSB retail bank means that she knows the staff and has deep experience of how the bank works.
The combination of Paul Pester and Helen Rose are the dream team not only to sell the business, but also to run the new bank.
Given all the challenges just laid out, and the fact that Antonio Horta-Osorio, the CEO of Lloyds Banking Group, wants to get the disposal of the 632 branches away as fast as he can, (for the very good reason that it will make it more difficult for the Independent Commission on Banking’s recommendation that Lloyds Banking Group should be forced to sell significantly more to be acted upon), the prospects of the outcome being a flotation, rather than selling to a new entrant, look increasingly likely.