Will everyone co-operate with this banking deal…?

The deal looks like it’s taking a step closer today, with both Lloyds TSB and The Co-operative Bank announcing a non-binding agreement for the latter to take over 632 branches belonging to the former, including their banking customers. This will also mean a farewell to the Cheltenham & Gloucester as a brand, as they will be sold to the Co-op.

In a way, one cannot but help be a little sorry for Lloyds TSB. At the height of the banking crisis they were encouraged (to what degree, I wouldn’t like to speculate!) to take over Halifax Bank of Scotland, and now are being forced by European Commission rules to sell a stake of their business to a new partner.

As part of this, Lloyds TSB has already been working to isolate a corner of it’s business that it can sell, in a little portion of it’s business named “Verde”. So the branches that will be transferred have all been identified, and it’s own management put into place.

Last year NBNK, a new company set up with the aim of launching a brand new bank in the UK, bid £1.5Bn for this Verde business. Today, the Co-operative have offered £350 million, with possibly up to an additional £400 million depending on how well the business performs. So at most Lloyds will be getting about half of what they could have got last year.

But also the sheer amount Lloyds are having to offer to get this sale through is staggering. They are underwriting the loan the Co-operative will need to borrow to afford to buy these branches. They’re offering £1.5Bn of equity capital, and £500 million of Tier 2 capital. The value of the loans and savings to be transferred is approximately £24Bn by 2013. They’re throwing in experienced managers, and their IT system. The current proposal includes Paul Pester, the current Chief Executive of Verde, to become the new Chief Executive of the combined banking group.

All of this, for at most £750M.

Why does this matter?

Well, we still own approximately 40% of Lloyds. Bearing in mind how much is having to be thrown into the sale, Lloyds will be suffering a huge loss. Lloyds states they’ll be rebranding all 632 stores, the “collateral” (cheque books, cards etc.) under the “TSB” brand prior to the sale. Rebrands aren’t cheap, and will cost Lloyds lots before they’ve even started. Plus the amount of capital to be transferred will leave a dent in the Lloyds balance sheet, although in all likelihood this has been prepared for anyways.

In short, Lloyds will be losing out significantly because of this deal. And as we own approximately 40% of this, it means we own less than we did before and aren’t recouping the full value (or anywhere near it) of the sale.

That doesn’t necessarily mean we’ve lost out. Because we own shares, and the value of shares depends on the mood of those who chose to buy and sell them, it may be that if the Lloyds brand is seen as more stable once the sale is complete and finally free of attracting regulatory pressure due to it’s size, that the stock market may deem Lloyds shares a good bet, which would increase the value of these shares and therefore our value of them when the Government decides to sell them.

If and when the Government sells its shares, if the market deems the sale to have left the Lloyds Banking Group in good shape. If there are no more skeletons to come out of the woodwork. A lot of ifs and buts when it comes to getting back our investment.

It’s not all good news for the Co-operative Group either. Yes, they’re going to grow into a new “Challenger Bank”. But at what cost?

As stated previously, the Verde Chief Executive will aim to be the new Chief Executive of the Co-operative banking group, which also includes the Britannia Building Society brand. One has to wonder if he’ll embrace the Co-operative’s “Ethical policy” and their member-driven ethos, or just carry on with his attitudes and behaviours from the past. (Bearing in mind I know nothing about the man and his own character traits, but one has to wonder how easy it will be for him to switch from one kind of banking culture into a different type).

The new group will use an separated out version of the Lloyds banking computer system for it’s customers, with those on Co-operative’s existing system moving across at a later date. This will involve hiring Lloyds IT systems “on a managed service basis, under commercial market terms.” Essentially the Co-operative Bank’s IT systems will no longer be its own, and its fate will depend entirely on relying on Lloyds’ IT infrastructure. That’s quite a leap of faith, less than a month after the Natwest fiasco.

To meet the stronger UK and EU banking rules, the Co-operative will have to change shape as well, holding far more reserves. Banking may become less a division of the Co-operative Group; instead forming a central hub where all obligations depend. A change in focus for the entity.

Finally, none of the statements mention anything about the fate of the employees of the branch network itself. While all branches are going to move across, many are in areas where the Co-operative already have at least one, if not two branches given it’s recent merger with the Britannia. How many of these will eventually be closed or merged in the years to follow?

Financial, cultural, IT and staffing issues will continue to stalk this deal as it gets thrashed out, approved and actioned over the next few years. How these are resolved will not only decide the perception and fate of the Co-operative Bank, but also quite possibly the shape and attitudes of the banking industry going forwards. Because if the “Ethical Bank” can’t get this right, what hope is their for the rest of the industry? And that question is the one that will bear down on everyone concerned with this deal in the months and years to come.

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