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Clydesdale suffers £3bn setback in bid to buy Lloyds branches

By Ian Fraser

Published: Sunday Herald

Date: May 29th, 2011

FSA demands raise capital cost of acquisition, while Sir Richard Branson say he expects to bid for 600-plus network. By Ian Fraser

Clydesdale Bank has lost its leading position in the race to acquire the 600-plus branches that Lloyds Banking Group has to sell, as bank sources conceded that attempts to negotiate looser reporting standards with the FSA would take around two years to conclude.

Sources said the FSA’s unwillingness to allow Clydesdale and Yorkshire Banks “advanced internal ratings-based” approach (AIRB), the status enjoyed by parent National Australia Bank on its home turf, will hamper the bank’s bid for the branch network that Lloyds is required by the European Commission to sell.

Under the Basel II regulatory framework, bidders granted AIRB status would be able to calculate the default risk attached to the Lloyds’ loan-books free from regulatory oversight. With AIRB, Clydesdale would have only had to raise £1 billion of equity capital to buy the assets in Lloyds disposal, known as “Project Verde”. Without the exemption, Clydesdale would need to raise £4bn of fresh capital to buy the assets.

One banking industry source said: “Without AIRB, it’s going to be a struggle for Clydesdale to make the numbers work. Another problem is that the Verde businesses come with a £25bn wholesale funding gap.”

Melbourne-based NAB is permitted to use AIRB in Australia and New Zealand. However, the Australian Financial Review last week reported NAB sources conceding that the FSA would not permit Clydesdale to use the same approach in the UK, at least until 2013. This will require the Glasgow-based bank to hold back far more capital in reserve, and restrict its freedom of manoeuvre.

The departures of Clydesdale’s head of finance David Lanc, who left in February 2011, and chief executive Lynne Peacock, who resigned in March but leaves next month, have been read in banking circles as signalling high-level disagreement over approaches to accounting standards.

The development will also be seen as a serious blow to the would-be seller, Lloyds’ new Portuguese chief executive António Horta-Osório. On March 1, the day he succeeded Eric Daniels, Horta-Osório said he wanted to accelerate the divestment of Lloyds brands including TSB and Cheltenham & Gloucester.

Horta-Osório later appointed Citigroup and JP Morgan to drum up interest in the assets which represent about 5% of the UK banking market. But his goal of finding a committed buyer for the assets by December now looks very ambitious.

Other bidders in the race include Virgin Money, and start-up bank NBNK Investments, which has several Scots on its board including former Tory and Labour ministers Lord (Michael) Forsyth and Lord (John) McFall. Both of these contenders face the same FSA-imposed capital hurdles as Clydesdale Bank. Virgin’s founder Sir Richard Branson last week said that he expected to make a formal bid for the branches in July

Industry sources said Clydesdale’s failure to win AIRB status reflects the FSA’s lack of confidence in its internal reporting standards.

Speaking about Clydesdale at a conference in Hong Kong in March, NAB chief executive Cameron Clyne said: “Whilst part of our portfolio, that’s going to drive a discount [in the share price] because it’s an underperforming part of our business in return-on-equity terms, and it’s also a more troubled part of the world economically.’’

Some industry analysts have speculated that NAB has “lost patience” with Clydesdale, and that its true intention is to run the bank on a “care and maintenance” basis precluding whole-hearted attempts at acquisitions.

However, a Clydesdale bank spokesman referred to remarks by Clyne to the Australian media last week which appear to indicate a continuing appetite for expansion.

Clyne said: “There is a lot of debate in the UK market at present about the future shape of the UK banking industry with a common theme being that the UK market would benefit from more traditional banks and more competition.

“This places our operations in a great position to capitalise on this sentiment. Our number one priority is and has always been to grow the business organically but in this climate it is also only natural that we would look at other options available to us.

“This would however, be against strict financial criteria with our key focus to generate value for our shareholders.”

Last year Clydesdale Bank lost the race with Santander to acquire 318 branches from RBS – although sources close to Clydesdale suggest the bank’s chief executive-designate, David Thorburn, pulled out following a due diligence process. The Glasgow-based bank also failed to secure a takeover of Dunfermline Building Society, which went instead to Nationwide.

A spokesman for Lloyds declined to comment. The FSA was unavailable for comment.

This was the business splash in the Sunday Herald on May 29th. View article as published on Herald Scotland

Short URL: https://www.ianfraser.org/?p=4165

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