Banks are important to the stock market. Not only do they own a fair chunk of the stockbroking industry between them, but bank shares are the largest single constituent of the FTSE 100 index. And they are widely held by private investors.
Aside from the fact that they are household names (and private investors like to buy shares in companies they recognise), all the building society demutualisations delivered truck-loads of bank shares into the hands of many who had hitherto not embraced the cult of the equity.
One such demutualising bank was Abbey National. Should the fact that Patricia Hewitt, Secretary of State for Trade and Industry, has blocked the bid from Lloyds TSB be viewed as a good or a bad thing by those investors?
Cards were fairly comprehensively marked that the Competition Commission would look unfavourably on bank mergers that delivered a significant proportion of current accounts into a single pair of hands. This is undoubtedly what would have happened if Lloyds had been allowed to go ahead. Some of the other arguments appeared more specious. Would competition really be affected in the small business banking market? I have my doubts, but the signs are clear for all to see. The commission and the Government do not wish to see the bigger banks getting together.
That is not to say we will not have more takeover activity at the smaller end of the market. Abbey National itself is arguably not big enough to compete in these days when size matters. But the benefits they might achieve through getting together with some of the smaller brethren on the high street is questionable. Take the two banks most mentioned in despatches as likely to fall under the hammer in the months ahead – Bank of Scotland and Northern Rock. Both have efficiently run businesses that are unlikely to benefit from integration into a company like Abbey National. Bank of Scotland would probably want to be in the driving seat in any event. Remember, they were the shrewd Scots who kicked National Westminster into touch two years ago. The Royal Bank of Scotland's trumping of their ace has given this Scottish rival a seat at the big table.
More likely, I believe, would be an extension of the cross-border consolidation between banks and life insurance companies. National Westminster itself was engaged in merger talks with Legal & General when Bank of Scotland stepped in and spoiled the party.
There are plenty of cross-selling deals taking place and it is far from fanciful to believe discussions on cooperation might lead to full-blown mergers in some cases. Friends Provident has been mentioned as a likely target, as it is at the smaller end of this market. It could be that shareholders find they own this FTSE 100 wannabe for only a comparatively short time.
The wild card is the way cross-border mergers might develop. National Bank of Australia has been mentioned as a potential buyer of Abbey, though it is hard to see the bosses of this former building society agreeing to be taken over by predators from Down Under, though National Bank already owns the Clydesdale, Northern and Yorkshire Banks. And do not forget there are plenty of European and American players with muscle and expansionary ideals out there.
One thing is certain, though. You should never build a portfolio on bid expectations alone. Simply have in the back of your mind the idea that the financial sector is alight with rumour and that eventually some of this smoke will turn into a full-blown flame. Insurance has become much more international, but retail banking remains stubbornly domestic in its focus. Perhaps the realisation that our home-grown giants have their hands tied on their own turf is the chance we have all been waiting for. It will make a change from the profit warnings that still abound.
Brian Tora is Chairman of the Gerrard Asset Allocation CommitteeReuse content