Merger of HBOS and Lloyds Bank

To say that stock markets around the world have been volatile over the last couple of weeks is something of an understatement. We have literally gone from the depths of despair to the joys of a US led bailout to save the day. While the likes of Lehman Brothers, AIG and the US investment banks have taken centre stage, the UK has had its own problems to contend with.

The main event in the UK has been the merger of HBOS and Lloyds Bank after the fallen giant that consists of the Halifax and Bank of Scotland was literally on the verge of going under. This was before secret talks between the group and Lloyds Bank were leaked and resulted in a last ditch takeover which was initially well received by the City.

However, it seems as though investor and observers who heralded the deal as a life saver for the UK After being asked to step in and help by the FSA and the government Lloyds Bank has been pushed onto the back foot after spending £12 billion to make the deal happen! finance sector are now having second thoughts.

Background to the HBOS deal

While the likes of the Halifax and the Bank of Scotland have histories which go back decades the group which Lloyds Bank has acquired was only created in 2001 when the two operations merged together. It seemed like a match made in heaven with the Halifax offering extensive exposure to the UK mortgage market and the Bank of Scotland offering an array of investment banking and financial service operations. When the deal was announced back in 2001 nobody could have expected to see the company literally falling to its knees in 2008 and in need of a rescue deal to stay in business.

The group itself reported revenue of £21.2 billion in 2007 and profits of £4.1 billion and a place in the top tier of the UK financial industry. However, as the credit crunch began to hit home it soon became apparent that those groups which had large exposure to the mortgage market would be hit hardest, bringing HBOS well into the frame. While the group managed to raise £4 billion only weeks ago in a controversial fund raising which left many shareholders unhappy it soon became apparent that £4 billion was not going to be enough to see the group through the credit crunch. The bank’s asset base had been holed below the waterline and with property price collapsing loses were mounting up on the groups mortgage book.

Timescale to disaster

The start of the problems for HBOS can actually be traced back to March 2008 when the shares we forced 17% lower after false rumours that the group was in trouble and had asked the Bank of England for an emergency loan to ‘tide the business over’. This suggestion was quashed by the board of HBOS but the battle lines had been drawn and it seems as though the group saw a deterioration in trading from early March up until the final takeover in September 2008.

The real ‘D’ day for the future of HBOS was the 17 September 2008, shortly after the demise of US banking giant Lehman Brothers which was affectively cut a drift. The US authorities refused to bail out the massive investment house despite the obvious repercussions this would have on stock markets around the world. As realisation hit home that Lehmans was dead and buried, investors started to panic about who would be next with HBOS top of the list of many City investors.

It was also around this time that we saw the money markets stall again and takeaway the life blood of businesses such as HBOS, which used the money markets to finance their mortgage deals. As the true extent of the Lehman Brothers collapse started to hit home we saw interest rates on the overnight money markets hit 8% in the UK with lenders going on strike or asking for higher interest payments to reflect the increased risk of lending money to ANY company.

On a number of occasions prior to the 17th September the FSA and the HBOS board were forced to issue confirmation that that the bank was fully funded and not in danger of going under. While technically this was true, the problem lay in the rising loses from the mortgage book and the fact the group would have to refinance tens of billions of pounds of debt over the coming weeks and months. The money markets were not playing ball with HBOS and news broke on the 17th September that the group was in talks with Lloyds Bank with regards to a takeover.

It soon became apparent that these talks had started some weeks earlier but had only really drawn to a conclusion on the eve of the 17th September when Lloyds Bank announced an agreed £12 billion offer for HBOS. Lloyds Bank, after been asked to step in by the authorities, had single handedly saved the UK financial sector from meltdown.

A Super Bank Will be Born

While there has been a growing demand for a rethink of the deal to create the banking super group it seems highly unlikely that there will be any reneging on the deal now, even though it needs to be voted upon by shareholders. Shortly after the deal was announced, the US authorities floated plans for their $700 billion rescue package for the US economy, share prices on both sides of the Atlantic rose substantially and there were murmurings that Lloyds Bank had managed to buy HBOS on the cheap.

The facts are that without the intervention of Lloyds Bank, HBOS would have been in administration and facing an uncertain future. While institutions and investors are stepping forward now with wise words after the event, where were these voices when the bank was on the verge of going under, where were the City buy recommendations and where were the alternative rescue deals – nowhere.

The combined group will be one of the largest in the UK and takes Lloyds Bank firmly up into the top four financial institutions in the UK. However, with cost savings in excess of £1 billion to come through it was disappointing to hear that experts fear the average cost of a UK mortgage will now rise by £600 a year due in the main to less competition and higher lending costs for the banks.


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