Maybe Lloyds should do what everyone else does when they are stuck with a property that won’t sell – call in one of the slicker estate agents. The bank is trying to sell off 600 of its branches, a requirement laid down after its merger with Halifax Bank of Scotland at the height of the credit crunch. But so far, there haven’t been many bidders. And those that have emerged haven’t been willing to pay quite as much as Lloyds was expecting.
So maybe Foxtons or Chesterton could come up with something suitably appealing. How about: a magnificent collection of former bank branches, with mixed Yorkshire and Scottish heritage. Colourful history. Fantastic development potential. Might be opportunities for conversion into coffee shops or pound stores. While they are at it, they could come up with a fresh sales pitch for Northern Rock as well. That too is up for sale, this time by the government, which was forced to take it over when it ran out of money in 2008. Buyers have been painfully thin on the ground, and none of them seem to think it is worth what the Treasury hoped it might fetch. The wider problem is that, right now, it appears that no one is very interested in taking a stake in the UK’s financial services industry. There is a message in this for the City, and not a very comforting one. While it has plenty of international business, the City’s core business is as a UK financial centre. The fact that no one want to touch the British banking industry suggests that there are tough times ahead.
It is rare that an opportunity to buy your way into the UK banking industry comes along. But this year, anyone who wants to have a crack has a once-in-a-generation opportunity. Lloyds is required to dispose of 600 branches. Buy those, and you have a ready-made branch network with a presence on most high streets. Throw in an advertising campaign and suddenly you are a significant player in what used to be one of the most profitable banking markets in the developed world. Northern Rock is a similar opportunity. The government pumped £1.4bn into the rescue of the former building society. At the time, we heard plenty of optimistic predictions that the taxpayer would eventually see a profit on the deal. But just like the Lloyds sale, the results have been disappointing.
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Perhaps the most worrying aspect of all this is that plenty of decent companies have taken a look at the Lloyds branches up for sale, including Virgin Money, the Co-operative Bank, and NBNK Investments, a new vehicle specifically set up to acquire the banking assets entering the UK market. None of them, according to the leaked reports, have been willing to pay the kind of money that Lloyds thinks the branches are worth. Instead, the bank now looks likely to create a new business out of those assets and hand it over to its long-suffering shareholders. It is probably better than doing nothing. But it is very much only a Plan B. After all, Lloyds shareholders have seen their shares fall by about 80% in the last four years. They would prefer some cash to shares in a business made up of the not-very-good bits of Lloyds.
Northern Rock, meanwhile, has been just as disappointing. Chancellor George Osborne had, no doubt, been hoping for a tidy windfall, enough to finance some juicy pre-election tax giveaways. Now he’ll be lucky to raise enough for a couple of new hospitals. Virgin Money appears the most likely winner at an auction few have bothered to attend, with a bid of about £1bn – far less than the government stumped up for the rescue.
Yet rewind just four years and everyone was trying to get into British banking. Santander spent billions snapping up UK assets, including the purchase of Abbey National. The Icelandic banks splurged millions on adverts for generous interest rates. The Dutch bank ING was on billboards across the country. And now? No one seems very interested. And it is not hard to understand why.
Consumers are in too much debt, and they are now paying it off when they can. Home ownership is declining. It peaked at 70% of English households all the way back in 2003, and has been falling steadily ever since. The banking industry was designed for an era when debt was expanding, and home ownership steadily rising. Now both are in decline. When people aren’t borrowing money or buying a home, they don’t really need a bank all that much. Anyone buying into the industry now is buying into a business that is shrinking. That is pretty ominous for the City.
It is true that London has carved out a lucrative niche for itself as a financial centre for the BRIC countries. There are still plenty of Russian companies listing here, and a few new hedge funds are being set up. But its core business is as a UK banking and financial centre. Once that role is lost, the future looks bleak.
Decline isn’t inevitable. The financial sector could be coming up with new types of mortgages that enable young people to get a foot on the property ladder. Or it could be working out a new type of retail investment that will actually make people money, now that equities look as if they could be stuck in what could be a 20-year bear market. But what it shouldn’t be doing is ticking along, hoping not much has changed.