HBOS gaffe gifts RBS round one in battle of the banks

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By Ian Fraser

Published: Sunday Herald

Date: 3 March 2002

IN the impressive surroundings of London’s Waterhouse Square last week, the Royal Bank of Scotland’s executive team was talking of record profits, mooted acquisitions in the US and Europe, and improved cost:income ratios, with a provision for bad debts which has soared to nearly £1 billion being the only sour note.

The bank’s “hard as nails” chairman Sir George Mathewson, chief executive Fred Goodwin and finance director Fred Watt finally seemed to have secured themselves iconic status in the banking world — not dissimilar to the hero worship once meted out to fallen idol Sir Brian Pitman of Lloyds TSB — as they revealed profits up 28% to £4.3bn, and talked up their bank’s prospects.

City analysts described the results as “absolutely spectacular”. If the executives were feeling any schadenfreude at the travails of their rivals HBOS, they were keeping it largely to themselves.

Earlier in the week, HBOS shot itself in the foot, even before it had the chance to disappoint City investors with the surprise news of a rights issue, which many City watchers feared was a way of tapping the markets to fund an unwanted price war, and buy market share by lending to potentially dodgy creditors.

As Robert Burns wrote in To a Mouse: “The best laid plans of mice and men gang aft agley.”

The smaller of the two banks, which is committed to shaking up the UK market with an aggressive pricing strategy, had opted to bring forward its results from Friday. The official reason was it was keen to report its annual results on the same day as it made its controversial cash call — which could not be undertaken on a Friday.

But unofficially the bankers on the Mound may also have been concerned that unveiling results on Friday would have seen them upstaged by RBS, which was due to report its own record results on Thursday.

But things had already started to go awry for HBOS by Wednesday morning when The Sun’s 10 million readers were confronted by a front-page story about a gaffe concerning a now notorious flip-chart, which had been left by a Halifax employee in a disused branch of the former building society in Manchester’s Trafford shopping centre.

On the easel was a handwritten sheet which revealed how HBOS is training its new business banking staff about how to gain a toe-hold in the realm of commercial banking — it seems, above all, they are being instructed to decline business from a wide range of sources, including start-ups.

In some quarters this might, conceivably, have been given a positive spin. It might even have been interpreted as revealing how the bank led by James Crosby was not risking it shareholders’ money by lending it to just anybody. But it did not tally with a bank that claims to be committed to addressing a market segment which it claims is characterised by “a significant failure of competition”.

Rupert Murdoch’s Sun, the highest circulation paper in the UK, said it its own inimitable way: “Halifax couldn’t give a xxxx: The bank that likes to say no.”

According to the rogue flipchart Halifax would not welcome any business from new start-ups and businesses that deal with coinage, such as taxi drivers, window cleaners, market traders, shops or supermarkets.

In the end it was a PR disaster, not on the same scale as Bank of Scotland’s flirtation with right-wing preacher Pat Robertson in 1999, but a disaster nonetheless.

Dennis Conyon, chairman of the National Taxi Association, was quoted as saying: “The suggestion that we are second class citizens is appalling.” A spokesman for the Federation of Small Businesses said: “It’s a fairly shoddy approach, an insult … They are perpetrating the myth that these businesses are not worth trading with.”

It could not have sent a worse message to the small business community south of the border — the SMEs with sub-£10m turnovers — which HBOS has said it is so keen to court. Some now will not even consider Halifax. Whoever left out the flipchart has probably done lasting damage to HBOS’s grand plan. After all, the whole logic of the HBOS merger hinged on the idea that Halifax would take advantage of Bank of Scotland’s business banking expertise to significantly boost its 2% share of that market in England.

Mathewson — himself no stranger to making the occasional PR gaffe — could not resist rubbing a little salt into the wounds the next day. The Royal Bank’s chairman said his bank’s share of business start- ups had increased, adding: “It is vital for the well-being of the economy that small businesses are supported on individual merit and not cherry-picked based on a prejudice about a particular sector or customer grouping.”

HBOS spokesman Shane O’Riordain said: “We are very sorry. It is embarrassing. But this is a problem we will fix.” He explained that Halifax branches have only recently started servicing business customers and that the note of the flipchart ought to have read “we are not yet able to service XYZ”.

HBOS’s insult to small traders was followed the next day by a surprise £1.37bn share placing which genuinely puzzled investors and was widely pilloried in the financial pages the next day. The Financial Times’s influential Lex column described it as “an opportunistic capital raid” with worrying parallels with Barclays’ disastrous 1988 rights issue. Furthermore, said Lex, the cash call was being made for “misleading” reasons.

John-Paul Crutchley, an analyst at Merrill Lynch, said it seemed HBOS’s shareholders were being tapped for new money just so that Halifax and BoS could fund a price war — with Lloyds TSB in the firing line. “The least they could have done would have been to warmed up the market a bit beforehand,” said another City source.

While executives at HBOS embarked on a damage limitation exercise, the team over at the Royal Bank were making it clear with a nod and a wink that further acquisitions are in the pipeline. Analysts believe that RBS may, for example, be interested in mopping up Allfirst, the Allied Irish Banks subsidiary which is in trouble after a fraud allegedly perpetuated by rogue trader John Rusnak. Goodwin said: “When we’ve finished [integrating Mellon], we’d like to buy more banks in the US.”

The bank also confirmed it would consider “tactical” takeovers in the UK and Ireland. Analysts speculated this could mean either Alliance & Leicester or Bradford & Bingley. Martin Cross of Teather & Greenwood, said: “We do see scope for tactical acquisitions, adding impetus to the earnings growth.”

The biggest fear was that Royal Bank had adopted a somewhat “racy” attitude towards its lending, a suspicion fuelled, for some, by the leap in provisions. In the corporate and markets division, which lends to large businesses such as Enron, provisions almost trebled from the first half to the second. But the Royal Bank flatly denied any lowering of its credit standards, although Goodwin admitted to a slight deterioration as the global economy had slowed.

The rivalry between the two banks may date back to the Hanoverian/Jacobite conflict of the early 18th century. But now that it has extended from a purely Scottish to a wider UK and European canvas it has become a war. HBOS may still be winning in certain niche areas, but round one has definitely gone to the Royal Bank.

Copyright SMG Sunday Newspapers Ltd 2002

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