British banks spurn global trend towards marriage

News Analysis: How has Britain avoided the outbreak of merger activity between banks in the United States, France, Spain and Portugal?

IN FRANCE the big three banks are locked in a seemingly interminable takeover battle. In the UK, following Axa's pounds 3.5bn takeover of Guardian Royal Exchange, and Lloyds-TSB's pounds 7bn takeover of Scottish Widows last week, Royal & SunAlliance, the composite insurer, is potentially in rival CGU's gun sights.

As far as mergers are concerned everyone seems to be doing it. Everyone, that is, apart from the British banks which, contrary to almost universal expectation, stubbornly refuse to merge.

Just last month a planned pounds 10bn merger between Bank of Ireland and Alliance & Leicester collapsed after squabbling over whether A&L's Peter White or BoI's Maurice Keene would get the top job.

The deal was just the latest in a string of attempted banking marriages to collapse very publicly outside the registry office door, stretching back to 1996 when both Prudential and Abbey National sought and failed to pull off a deal with National Westminster Bank.

Others have got equally as far only, thanks to somewhat tighter security, to collapse out of sight. While Royal Bank of Scotland has been openly lobbying the City to back a merger with Barclays, its Scottish neighbour Bank of Scotland has been equally energetic in pursuit of merger partners. But also rather more discreet.

The bank, according to some accounts, came close to forging a merger deal with Woolwich more than six months ago, only to fall out at the last minute, again, it is understood, over whether Peter Burt or his opposite number at the Woolwich, John Stewart, got the top job.

As one investment banker said yesterday: "Everyone is talking to everyone. The question that no one really knows is which, if any of these talks, will get anywhere."

Peter Toeman, a banks analyst at ABN-Amro, believes there are reasons apart from the squabbling over top jobs that the long-awaited consolidation among the UK banks has not happened.

"First," he says, "the UK banks are more consolidated than banks in either the US or Europe. Second, there is the fact that the deals that people would like to do, namely a big cost-saving merger between the clearing banks, raises all sorts of monopoly issues."

In Britain, the top five institutions account for 53 per cent of retail deposits - more than twice the proportion held by the top five in the US.

Some investment bankers are sceptical about the argument frequently heard in banking boardrooms that the government would block a big banking merger on the grounds that the big four already account for 80 per cent of the small business market.

But so far none of the banks is ready to risk unpopularity by actually testing the government's resolve.

To some degree, the outbreak of merger activity last year in the US, and which has spread with a vengeance to France, Italy, Spain and, most recently, Portugal, this year, is merely a sign of both the Americans and the Europeans trying to catch up with what has already happened here.

In Britain, the last big wave of merger activity happened some years ago when HSBC took over Midland, Abbey National took over NPI and Lloyds took over C&G and then in the 1995 the TSB.

There are other reasons too. The takeover by Halifax of Leeds Permanent is seen by consultants as a textbook example of how, when merging two retail banking branch networks, two and two often barely makes two-and- a-half, let alone four.

Banks have found out by bitter experience that when you close a branch, most customers decamp in disgust to a rival rather than switching to the nearest branch of their existing bank.

Even more frustratingly for bankers, customers see alternative channels such as the Internet, cash dispensers and the phone as an add-on rather than a substitute for their existing relationship with the bank manager in a suit.

Proponents of banking mergers such as Fred Goodwin, the deputy chief executive of the Royal Bank of Scotland, believe that areas like information technology and back-office processing are much more likely to yield cost savings.

Significantly, Lloyds TSB, the bank which is seen by many as the arch- consolidator, has in practice been slower at closing branches than people think.

Ian Harley, who succeeded the wheeler-dealer Peter Birch as chief executive at Abbey National, has given up looking for the elusive big deal. He believes that the big picture mergers the market is crying out for would destroy value. Jim Crosby, who took over from Mike Blackburn as chief executive at the Halifax, also takes that view.

Meanwhile, Prudential has publicly abandoned the chase for a bank to concentrate on Egg, its direct banking operation.

Many, perhaps cynically, believe that the reason the deals have not happened is that rationalisation is always painful and for the time being, there are no pressing reasons why those who run Britain's banks feel they have to submit themselves or their employees to self-inflicted pain.

Those who say they want to do the deals also want to end up on top. But even in a merger of equals, someone has to give ground.

So is the party over, or more accurately, has it been indefinitely postponed? Sir Brian Pitman, the Lloyds TSB chairman, clearly does not think so.

Despite having just splashed out pounds 7bn of his shareholders' money last week on Scottish Widows, he insisted that this was not the end of the story, and that he still had a big "transformational" deal in his sights.

Others including Derek Wanless, chief executive at NatWest, and Sir Peter Middleton, executive chairman at Barclays, also believe consolidation will happen, but not before something happens to shift the terms of engagement.

The last few years have generally been good for the UK banks. The last few months even more so. As one seasoned deal-maker said yesterday: "Only insecure chief executives do deals."

Clearly, UK bankers as a breed are not yet convinced enough to fall en masse on their swords. John Tyce, a banks analyst at SG, has no doubt who is to blame for the dearth of banking deals.

"There are some deals that could be done that would make everyone rich," he says, "but management vanity stands in the way."