LloydsTSB-HBOS merger details unveiled
Jobs and IT spend set to fall across the financial services sector
The details of the proposed merger between LloydsTSB and Halifax Bank of Scotland (HBOS) were unveiled in a circular to shareholders on 3 November that revealed the group expects to save almost £1.5 bn per year by 2011, mainly by slashing IT costs, economies-of-scale savings from integration projects and cutting jobs, with some press reports suggesting 20,000 positions could go, largely from the retail division. The merger, which will create the UK’s biggest mortgage lender with a 29 per cent of the market and a similar number of current account holders, gained approval from the business secretary, Peter Mandelson, on 31 October when he confirmed he was setting aside anti-monopoly laws in the national interest of ensuring the survival of HBOS from the financial turmoil sweeping the globe. The two banks together have 140,000 employees, 2,800 branches and 38 million customers
Eric Daniels will be chief executive of the enlarged group, with Victor Blank, also from LloydsTSB, as chairman. Chris Wiscarson will get the tough job of integration director, with Mark Fisher replacing him as director of group IT & operations. The merger will complete early next year, subject to shareholder approval.
The government effectively already owns 43 per cent of the new bank, to be called Lloyds Banking Group plc, after its bail-out in early October when it injected £17 bn for an equity stake in the business, as part of its recapitalisation plan to save the British banking industry during the meltdown of the financial markets in September and October. The government also announced £200 bn in extra liquidity for the markets and a £250 bn scheme that aims to get banks lending to each other again by guaranteeing any such loans for the next three years. The recapitalisation aspect of the £500 bn rescue package – or part-nationalisation, call it what you will – also includes £20 bn to the Royal Bank of Scotland for a 60 per cent equity stake, with similar deals available to other leading UK banks that may hit troubled waters, although restrictions will apply to executive pay, bonuses and dividends. Barclays Bank is hoping to avoid these issues by staying out of the government equity scheme and seeking to raise £7.3 bn from state investment funds and the royal families of Qatar and Abu Dhabi, which would give Middle Eastern investors a 32 per cent stake in the bank.
The European and US governments subsequently announced similar bail-out packages in October, following the collapse of Fortis, Lehman Brothers, Merrill Lynch, saved by Bank of America’s takeover, Washington Mutual, AIG, and many other major financial services providers, with America designating $250 bn for recapitalisation schemes, as part of its wider $700 bn bail-out for Wall Street. The calmer atmosphere on the financial markets in recent times shows the threat of a meltdown has now been averted but a recession still looms and many years of hard struggle towards a recovery await. The future shape of the industry is also set to change with increased regulation and transparency likely in the years ahead, and hopefully better risk management. A recent gathering of world leaders in mid-November in Washington has been prematurely dubbed ‘Bretton Woods II’ – that’s a bit strong but there’s no doubt the global financial structure will change after the worst crisis to hit the world since the crash of 1929.
Job losses
The full affects of the credit crunch can increasingly be felt in the real economy with the UK, US, Germany and others officially now in recession and job losses announced across the financial services sector. RBS revealed in November it is to cut 3,000 jobs from its global banking and markets workforce, with many positions likely to go in the City. The bank declined to comment on the move accept to say that it: “constantly reviews its operating model to make sure it is appropriate to the market condition, and takes
action accordingly”.
Others to shed jobs include UBS which expects to lose another 2,000 positions, on top of 4,000 already lost, by year-end, with Deutsche Bank axing 1,100 back-office jobs, and Goldman Sachs announcing it will trim its global workforce of 32,000 by ten
per cent. The jittery Citigroup, which required an extra $20 billion from the US Treasury on 24 November, on top of the government's $25 billion bail-out last month, is cutting 52,000 extra jobs worldwide, as it struggles to survive. The recapitalisation means that no dividends will be paid for a while and Citi still has an estimated $1 trillion worth of bad debts off balance sheet. It received $300 billion in government loan guarantees for bad loans and investments to try and neutralise this and prop up its falling share price.
Meanwhile Barclays Capital is expected to shed 3,000 jobs after taking over Lehman’s American investment banking and capital markets unit earlier in the year, with thousands more likely to go from the BoA/Merrill link-up. The Centre for Economics and Business Research is predicting 62,000 City jobs will go by the end of 2009, returning staffing levels to that of the 1990s.
IT wages will also suffer. JPMorgan, for instance, wrote to contractors recently insisting on a 15 per cent pay cut. Barclays, Deutsche Bank and RBS, among others, have taken similar action. Following the crisis, the IDC consultancy is halving its IT spend prediction for 2009 in Europe, Mid-East & Africa to just three per cent.
Research and advisory firm, Gartner, is encouraging financial institutions to come up with a clear crunch strategy if they want to survive, encouraging banks and others to either focus on IT innovation for growth-orientated projects or to hibernate to weather the economic downturn. “Far from being fast followers, any companies that fall in-between these two options will be ditherers and laggards,” says Alistair Newton, a research vice president at Gartner. “They’ll simply be wasting their IT budget on incremental modernisation, which will have little or no consequence for their business.”
Commenting on the UK government’s recapitalisation scheme TowerGroup consultancy’s European research director, Bob McDowall, says that he thinks it risks splitting the country’s banking industry in two, with the government-backed sector increasingly following lower risk corporate strategies in future. “The solution will change the strategic landscape of the UK finance sector and create a clear divide in business priorities for those who have and haven’t received funding for the foreseeable future,” he says.
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