The banking sector has been rocked by the news that Lloyds TSB is to buy mortgage giant HBOS. Rebecca Atkinson discusses what the merger would mean for customers, shareholders and the banking sector.

Even before the rumours of the shotgun merger between Lloyds TSB and HBOS were confirmed, the two companies saw their share prices creep up after two days of dismal performance.

The BBC broke the new that Lloyds TSB is in advanced talks to buy HBOS, in a move that would create super-retail institution, early Wednesday morning but the speculation was only confirmed at around 1pm.

In a statement on Wednesday, HBOS said: "The board of HBOS confirms that it is in advanced talks with Lloyds TSB Group which may or may not lead to an offer being made for HBOS."

And by Thursday the deal had finally been agreed, with the terms valuing HBOS at £12.2 billion.

The chancellor Alistair Darling says that unless the deal goes ahead, the banking sector faces a "very bleak" outlook. As a result, the government has used its power to bypass competition rules that may have blocked the merger.

So, it appears the move is good for the banking sector, and therefore the economy. But what about customers of Lloyds TSB and HBOS, shareholders and consumers at large?

Impact on customers

An estimated two out of every five UK households are HBOS customers, and its Halifax brand is perhaps the best known bank on the high street.

On one hand, the news is good. Once Lloyds TSB buys HBOS, both firms will see their position in the market strengthened. Lloyds TSB says the deal will shave its costs by £1 billion a year, and will allow the combined group to effectively weather the impact of the credit crisis.

If you are an HBOS mortgage borrower, then the merger will not impact your repayments and you will still be expected to pay back your debt. Lloyds TSB says it has no plans to scrap the HBOS brand, but there is a chance that some of the different subsidiaries could be closed or merged. The only imapct this will have on you, however, is that the brand of your lender may change.

Lloyds TSB also says that it has no plans to reduce the amount of lending either bank does - in fact, it was to increase its mortgage activity once market conditions improve. It also intends to introduce more products for first-time buyers, such as shared equity loans.  

If you are an HBOS saver, then again don’t expect any material change from the merger. Any savings you have up to £35,000 in a British bank are covered by the Financial Services Compensation Scheme (FSCS), and this limit could be increased further early next year.

However, one point worth considering is how many accounts you have; currently, the HBOS group is regulated by the FSA as one bank rather than several. The FSCS only covers you up to £35,000 per bank – therefore, if you have £20,000 in a Halifax account and £20,000 in a Bank of Scotland account, not all your money will be protected by the scheme. Again, this may change under new laws currently under consideration.

Once the merger goes ahead, then the regulation of Lloyds TSB may be combined with HBOS or all the brands could be separated – this could have a bearing on how protected your money is.

Despite this, as it is far too early to know what will happen, customers should not worry unduly about their money.

Impact on shareholders

HBOS has over two million private shareholders, the biggest private shareholder base in the UK. It says around 80% of its shareholders are also its customers, and its small shareholders account for 7% of the total value of all shares held by private individuals in FTSE 100 companies.

The terms of the deal mean HBOS shareholders will receive 0.83 Lloyds TSB shares for every one HBOS share they hold - which values HBOS at £12.2 billion. 

Once the deal completes, existing Lloyds TSB shareholders will own approximately 56% of the issued share capital of Lloyds TSB with existing HBOS shareholders owning approximately 44%.

The board of HBOS has stated its intention to 100% recommend to shareholders to vote in favour of the acquisition. It is expected the terms - known as the scheme document - will be posted by November 2008 and the acquisition completed at the end of 2008 or early 2009.

However, both HBOS and Lloyds TSB customers will have to vote in favour of the deal before it goes ahead. Considering Darling's warning of what could happen if HBOS is left as an independent company, it can be assumed shareholders will give it the green light. 

Impact on banking sector

The news of the merger may have left other banks quaking in their boots – and well it should. A tie-up between Lloyds TSB and HBOS would create a super retail bank, with a leading market share of the mortgage market and an extremely respectable chunk of current accounts and savings.

In addition, HBOS has long been known as the bank that will never fail. Although, at this stage, there is no indication that HBOS is not solvent or financial stable, it is effectively being “rescued” by a competitor. If HBOS can fail, then question on everybody’s lips is who’s next?

HBOS isn't the only financial institution to have been given a lifeline by a rival firm. Alliance & Leicester is being bought by Santander, the Spanish owner of Abbey, while Nationwide is merging with two of its smaller building society rivals, Derbyshire and Cheshire. Beleaguered Bradford & Bingley is reportedly open to takeover offers, and Virgin Money has made no secret of its interest in Northern Rock once it passes back into private ownership.

Some experts say this consolidation is bad news for consumers as it means less choice.

Kevin Mountford, head of banking at moneysupermarket.com, explains:"A shotgun marriage of HBOS and Lloyds TSB would not be in the best interests of British consumers. With the Santander/Abbey takeover of A&L confirmed and building societies disappearing seemingly daily we are seeing a large reduction of competition and choice for consumers.

“It is the likes of A&L and Halifax that have been the most competitive for current accounts and many other products.”

Despite Lloyds TSB saying it wants to increase mortgage lending, experts are convinced. 

Louise Cuming, head of mortgages at moneysupermarket.com, says: "The two giants of British banking control six major mortgage brands. We need to wait and see how many of these survive the merger. Obviously if some of these disappear, customer choice and competition will be eroded, which can only be to the detriment of borrowers.

"Lloyds TSB has always run a very conservative ship and I have no doubt the merged operation will have a diminished appetite for higher risk specialist lending. This could leave borrowers without a squeaky clean credit rating or a large deposit without a hope of being accepted by the new ‘super bank'.

"On a positive note, there is no doubt consumer trust in the mortgage industry is extremely fragile, and the merger could go some way to restoring consumer confidence."

Mountford adds that an independent HBOS is a better option for consumers.

Reaction

The FSA as well as the Treasury are reported to support the move, as they have been very concerned that HBOS’ falling share price could prompt its financers to pull credit lines with the bank.

Robert Peston, the BBC’s business editor, says: “[The FSA and Treasury] will welcome the takeover as it puts HBOS on a sound footing.”

Speaking to the BBC, Vince Cable, deputy leader of the Liberal Democrat Party, blamed HBOS’ problems on falling house prices as well as hedge funds and the notorious practice of short-selling (profiteering from stocks that fall in value) at the “expense of taxpayers”.

The Financial Services Authority has reiterated that it is satisfied that HBOS is “well-capitalised” with “satisfactory” funding lines.

It says: “The announcement [the Lloyds is buying HBOS] is a welcome move as it is likely to enhance stability within financial markets and improve confidence among customers and investors in the UK financial sector.”

Simon Denham, managing director of Capital Spreads, says it is now clear that HBOS, Bradford & Bingley, Alliance & Leicester and Northern Rock, as well as investment banks such as Merrill Lynch and Lehman Brothers, were too reliant on the money markets for funding.

Fast facts

* The HBOS group of companies includes five saving and mortgage banks – Halifax, Bank of Scotland, Birmingham Midshires, BM Solutions and Intelligent Finance – as well as pension and investment specialist, Clerical Medical, car and home insurance firm, esure, and financial adviser network St Jame’s Place. It also includes Insight Investment, a retail fund and institutional investment management specialist.

* Lloyds TSB group includes Lloyds TSB, Lloyds TSB Scotland and Cheltenham & Gloucester as well as Scottish Widows. Together, these brands boost some 16 million customers and 67,000 members of staff.

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