Neelie Kroes, the European Union competition commissioner, is on Tuesday set to warn UK banks for a second time within a week that they may have to make disposals as a condition for the granting of state aid.
Ms Kroes’s tough message to the British Bankers’ Association conference emphasises the hard line that the EU is ready to take with UK banks that have received state aid – notably Lloyds Banking Group and Royal Bank of
Under EU rules, companies that are bailed out with government money are generally required to restructure to offset the competitive advantages stemming from the assistance.
Senior bankers have been saying privately that the EU has been “sabre-rattling” in recent weeks to ensure that state-aided banks have “taken sufficient pain”.
“The discussions are very tough,” says one Brussels-based lawyer involved in the talks.
The two banks most affected will be Lloyds, which is 43.5 per cent owned by the state, and RBS, which is 70 per cent state-owned. As well as taking government equity, both are using the state’s asset protection scheme, which allows them to ringfence toxic assets.
Robert Law, an analyst at Nomura, said: “Given that Lloyds has disclosed that it is being investigated by the EU for state aid . . . we believe that there must be a strong likelihood of RBS facing similar investigations and/or sanctions.”
The two precedents to date make clear that the European Commission is taking a tough stance. Commerzbank and WestLB of Germany were required to cut their asset bases by 47 and 50 per cent respectively in return for state help, although Commerzbank has been given up to five years to make some disposals.
Such a drastic measure is considered unlikely in the UK because a large enforced reduction in the loan books of RBS or Lloyds would have a severe impact on the UK economy and reduce the availability of credit to consumers and businesses. Yet significant disposals look inevitable.
RBS is already shrinking its £2,000bn balance sheet by about a fifth. The bank has hived off £240bn of loans including commercial property that will either be run down or sold off in a unit to be managed by Nathan Bostock, the new RBS executive.
The bank is also selling its Asian operations, which could be worth between £500m and £1bn. Interested buyers include Standard Chartered, HSBC and ANZ Bank.
Lloyds, which rescued HBOS last year, has already indicated it may have to make big disposals in return for state aid. One way of doing this would be to sell “non-core” assets such as its overseas operations.
The banking group would certainly prefer this course to the alternative: that the Commission might order it to sell “core” businesses – such as one of the constituent parts of HBOS or its Scottish Widows insurance arm.
A further-reaching more This has raised the prospect that Lloyds, which dominates retail banking in the UK, might have to part with either of the constituent parts of HBOS - its Halifax or Bank of Scotland divisions - or its Scottish Widows insurance arm.
Having to part with HBOS or Widows would hit Lloyds’ profitability and undermine its dominance in the retail banking market. The bank has restructured Widows over the past four years and is looking to reap the benefits of further cost synergies. It would not want a potential buyer to be the beneficiary.
“Once the current crisis is past, there is likely to be uncertainty over the level of profitability that the enlarged group will be allowed to sustain, given the market share it has,” says Mr Law at Nomura.
Rather than wave an enforced farewell to any division at the heart of its retail banking core, Lloyds has begun reviewing its insurance operations and is looking to sell parts of the business.
It has already been in talks to sell part of the fund management arm it gained when it merged with HBOS to a private equity-backed management team for up to £300m.
Potential buyers for insurance assets could include Clive Cowdery, the insurance entrepreneur, who has between £5bn and £7bn to spend on deals.
However it is not thought to have plans in the short term to sell off Scottish Widows, the life assurance arm.
The bank has restructured Widows over the past four years and the acquisition of HBOS allows it to deliver further cost synergies itself rather than allow a potential buyer to gain the future benefit of any cost savings. Potential buyers for insurance assets could include Clive Cowdery, the insurance entrepreneur, who has £5bn to £7bn to spend on deals.
Lloyds is also considering selling stakes in about 60 companies built up by HBOS’s controversial integrated finance unit in sectors such as leisure.
Other disposals could include its 60 per cent stake in St James’s Place, the up-market life assurer, or its stake in Sainsbury’s bank, which is part-owned by the retailer.
As yet it is unclear how draconian the Commission is likely to be.
In April, broad rules were promised by the Commission to clarify what banks must do as a condition for state aid. But their publication has been delayed several times, supposedly because of internal dissent. They are now due to be published in mid-July: Ms Kroes’s words suggest that they will make challenging reading. -----------
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