Margareta Pagano: Even at an Aldi discount, Lloyds is still a gamble

It's hard to believe our banks were the envy of Europe
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The Independent Online

Michel Pébereau, the head of BNP Paribas, the French banking giant, told me an age ago how he would love to buy Lloyds Bank but couldn't afford to because of the huge premium he would have to pay for what was then one of the most profitable banks in the world.

Another top French banker, René Carron, the boss of Crédit Agricole, also admitted to me after he had been on a shopping spree buying up many of Europe's banks, that his favourite target would be a British bank because of the fat profit margins.

And when Alfredo Saenz, head of Spain's Santander, popped over to the UK five years ago to tie the knot with Abbey National, he expressed a similar desire, although he was luckier in his courtship. At the time, Saenz explained his passion for UK retail banks with refreshing honesty: "We think it is one of the most attractive markets in Europe, with rational markets producing rational competition. UK banks make three times more profit than French banks and seven times as much as German banks."

What Saenz really meant with his delightful "rational competition" was that British banking was a magnificent money-making machine, a cartel dominated by five big players, and a few tiddlers. It still is. Ironically, it's taken the near collapse of the banking system and the heroic actions of European Competition Commissioner Neelie Kroes to start busting the cartel that the Europeans so envied.

The break-up she has ordered at Lloyds, RBS and Northern Rock is the price to be paid for billions in state aid, but it will only tinker with the retail banking market. With interest rates low, the banks will soon be making big profits again. The Government knows this, which may explain the desperate way Gordon Brown and Alistair Darling were spinning the news that three new banks were being created to promote competition, rather than admit that they had been forced to carve up existing banks.

If the Government believes its own spin that retail banking needs a shake-up, it follows that a proper competition inquiry should be launched, as George Osborne, the shadow Chancellor, has called for. There isn't a shred of evidence that bigger banks are more efficient. So the challenge for regulators now is to encourage even more competition by helping new banks to start up – new home lending groups, even using the Post Office more effectively. But, most of all, finding new ways to get capital flowing into small and medium-sized companies, maybe even new forms of micro-finance.

Successive governments oversaw policies which allowed the banks to become reckless, seeing RBS gobble up NatWest as well as ABN Amro, which destroyed it, and Bank of Scotland take over Halifax to become HBOS, leading to Lloyds' own near-collapse. Buying Lloyds shares today, even with the Aldi-style discount which it will need to get the latest rights issue away, is still a gamble as there won't be any dividend for two years, and, as we report, an FSA inquiry into the HBOS cash-call is under way, while the full horrors of its loan book have yet to unfold. Lloyds claims it is back on the road to recovery, but it's still one for the brave, more a rescue operation than an investment. Even Pébereau would not be tempted at this price.


The only surprise about Lord Sugar's clanger was that it didn't come sooner. As some of us warned from the moment the Apprentice star was made the Government's enterprise czar, his appointment could only be trouble. But even I didn't imagine that he would be quite so crass as to annoy the entire small business community by branding our budding entrepreneurs a bunch of moaners living in Disneyland.

His outburst in Manchester was classic Sugar; insensitive and rude – and claiming that 85 per cent of small businesses that applied for bank loans did not deserve any loan at all was one of those big generalisations that always ends in disaster. As rival digital Dragons' Den star Julie Meyer quipped: "Sugar is confusing his role as a potential lender of last resort with that of the Government or a bank, and I do believe this is evidence that he may have forgotten the lessons of his early years as an entrepreneur."

But, while Sugar's admonition was completely off-beam, I have to admit he's right to warn that many small businesses which blame the banks for not lending to them are perhaps being economical with the truth. The reality is that banks have hardly ever been the main source of capital for start-ups, as they want assets as security. Sugar's mistake was to brand all small businesses with the same brush, and that's where his crudity always gets him into trouble. Instead of handing out insults, Sugar should concentrate on helping the Government and the banks get the capital flowing to business again.


Billionaire Warren Buffett likes to compare his collection of companies to a masterpiece which he has now been painting for nearly 50 years. The extraordinary 79-year-old Sage of Omaha has just added a brilliant orange stroke to that painting – paying £27bn to buy the monster trains of the Burlington Northern Santa Fe Corporation, one of America's biggest railroads. Even for Buffett, this is the most enormous gamble, making railways the third-largest of his investments after insurance and utility companies. On buying BNSF, Buffett explained he was making an all-in wager on the economic future of the US: "I love these bets." With few rivals in the sector, tougher environmental rules and higher oil prices, Buffett is banking on rail regaining its glory, but some investors are questioning whether he's gone a step too far. But, as with his bets on ice cream, Coca-Cola and razor blades, this could be a stroke of genius, and perhaps his greatest yet.