The proposed takeover is the latest and biggest in a series of consolidating mergers in the financial services sector as banks and building societies seek to cut costs and improve their competitive position.
News of the merger plan, which is at a very advanced stage, was described as "appalling" by Leif Mills, general secretary of the Banking and Insurance Finance Union (BIFU). "This would mean savage cutbacks in the branch network and less consumer choice," said Mr Mills.
City insiders warned of job cuts of 20,000 over several years, out of a combined workforce of 90,000. The merger calculations, worked out by Lloyds' advisers, Baring Brothers, are said to be based on an ambitious savings target of pounds 2bn, which would mean taking out some pounds 400m annually from the combined operations. To be known as Lloyds TSB Group plc, the combined bank would have more than 3,000 branches and a market value of pounds 15bn.
HSBC, which owns Midland, remains the UK's biggest bank, but many of its operations are overseas.
Sources close to Lloyds and TSB management stressed that most job cuts would be by natural wastage and spread over a number of years. British high street banks have already cut over 60,000 jobs in the last five years, while Lloyds' chief executive, Sir Brian Pitman, himself said earlier this year that another 75,000 would have to go throughout the industry.
Lloyds' branch staff currently total 43,500 at 1,800 outlets, mostly in the south of England, while the TSB has 24,000 workers at 1,200 branches, mainly in the north and Scotland. However, BIFU warns there is significant overlap in the Midlands and Wales.
Unions and consumer groups want the deal investigated by the Monopolies and Mergers Commission (MMC). BIFU's Mr Mills wrote to Ian Lang, Secretary of State for Trade and Industry yesterday calling for a referral to the MMC, saying staff and customer choice were threatened. An MMC probe could blow the deal off course.
Lloyds' previous attempt at a dash for growth, when it bid for Midland Bank in 1992, was abandoned when anMMC probe appeared likely.
Lloyds has shed 15,000 people since 1991, while TSB has cut 8,000 in the same period. TSB is closing 200 branches this year and plans to do the same next year.
City analysts said yesterday that the main targets for cuts would be the Lloyds administrative centre in Bristol and its TSB equivalent in Birmingham. Other overlaps occur between the Lloyds Abbey Life insurance operation in Bournemouth, Dorset, and TSB insurance in Andover, Wiltshire.
There will also be overlaps between Cheltenham & Gloucester, Lloyds' recently acquired mortgage arm, and TSB's Mortgage Express.
Kate Scribbins, head of money policy at the Consumers Association, said both Lloyds and TSB lagged behind other banks and building societies in a recent survey on service.
"[The merger] is good news if any savings... are used to improve standards of service and quality of products," Ms Scribbins said.
The new Lloyds TSB will have almost a tenth of the UK mortgage market and nearly a fifth of small business lending. Under the deal, Lloyds will end up owning 70 per cent of the bank while TSB shareholders will get a "special dividend" of 68p per share, totalling pounds 1bn, and shares in the new bank. If the deal goes ahead it values TSB at over pounds 5bn.
The new chairman of the group will be Sir Robin Ibbs, chairman of Lloyds, while Sir Brian Pitman remains as chief executive. But Peter Ellwood, chief executive of the TSB, who will take over responsibility for integrating the key retail operations of the two banks, appears to be well positioned as chief-executive designate of the new banking giant when Sir Brian retires.
TSB's shares rose 79p to 353p and Lloyds by 21p to 726p.
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