Business View: US banking deals are big and bad and can't be ignored by the Brits

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The Independent Online

In the last three months, American banks have struck deals worth more than $108bn, or just short of £60bn, given that the dollar is feeling a bit more perky this week. To put this in context, that's more than the twice the current market value of Lloyds TSB and is enough to buy the Royal Bank of Scotland and leave some change. The fact that hardly anyone in the UK will have heard of FleetBoston, or Bank One for that matter, does not stop the feeling seeping through the City that British banks are being left behind.

But should this be the right reaction? Seeing Citigroup, Bank of America or JP Morgan Chase snapping up their regional rivals might not cause too much of a flutter over here. After all, America is full of regional banks, and consolidation has been carrying on at a decent pace for the last decade and a half. However, there are some very good reasons why these deals have to be taken seriously.

The first is the impact on the ambitions of our lenders. Royal Bank of Scotland has been gradually expanding in the north-eastern United States via its Citizens bank. Suddenly, along comes Bank of America and spends nearly $50bn snapping up the biggest player in the area, FleetBoston. This not only put the proverbial elephant in RBS's fridge; it upped the prices of banks it wanted to buy. Sovereign Bancorp, the Philly bank that was its favoured target, suddenly became a bit too pricey. RBS is now supposedly eyeing Washington Mutual, but that, likewise, could be too expensive. Barclays has also been looking in this area, but found it was shopping at Harrods not Tesco and is thinking again.

Second, is a terrible tendency to play "copy the Yank", on the assumption, shared by many in business, that Americans know best. So when Citigroup went out and bought a lender that specialised in the credit impaired, HSBC went off and snapped up Household International. Whether Household is a good deal has yet to be proven.

Third, is the sheer impact of the size of these deals. After it has merged with Bank One, Morgan will be worth more than $125bn. Bank of America is a similar size, and Citigroup is valued at more than both put together. Indeed, it is worth more than the entire UK banking sector.

These market values will give the US banks a great advantage in the consolidation of European banking that is bound to come. This has been talked about for ages and has been stymied by the traditional reluctance of the French to allow anyone else into their business community, the traditional anarchy in Italy and the non-traditional problems of the German financial system. But the process will come, and it will probably start with the sale of something like Fortis, the Belgian/Dutch banking and insurance group.

Where will the Brits be in the battle? Largely on the sidelines. HSBC seems interested only in the very rich or the very poor, and Europe is full of middle-income people. RBS is focused on America, though this position might change. Barclays is dipping its toes into European waters, but is nervous. Lloyds TSB is totally out of the game.

Only a couple of years ago, Lloyds appeared to be the one UK bank committed to expanding its remit. But the appointment of Eric Daniels, himself a Yank from Citigroup, has changed this. Mr Daniels wants to spend the next couple of years sorting out the UK business, getting more business from customers it already has and repairing the balance sheet without cutting the dividend.

This introspection did not fit well with the ambitions of Lloyds' deal-making finance director, Philip Hampton. So he went. (Mr Hampton's departure also means he does not need to explain to the City why, when Lloyds maintains its overly generous dividend, its earnings will be only 1.2 times the payout, when he had previously said they would be 1.5 times.)

Shareholders who shunned Lloyds last year will like this "stick to the knitting" approach in the short term. In general, institutions do not like mergers and acquisitions. One was claiming to me the other day that RBS would have been better off not buying NatWest, one of the few genuinely successful strategic deals ever struck by a UK bank.

This is all a bit short sighted. OK, the returns might be better for a year or two if British banks don't go shopping. But in the longer term, this negativity will leave them flat, rather than fleet, footed.

j.nisse@independent.co.uk

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