Lloyds Banking Group and the Royal Bank of Scotland (RBS) will have to sell off almost 1,000 branches between them after the European Union demanded the groups be broken up to increase competition, and as a quid pro quo for the state aid they've received. The UK government has also announced it'll put another £5.7bn of bail-out money into LloydsBG and £37bn into RBS, despite the fact that the bank announced a Q3 loss of £2.2bn on 6 November, or perhaps precisely because it did.

RBS is also putting £282bn of its toxic assets into the Government Asset Protection Scheme (GAPS), paying £700m a year for the insurance, and the UK government's extra bail-out money means its stake in the group rises to 84 per cent. Lloyds Banking Group is to avoid GAPS, paying a £2.5bn penalty to do so, by raising £21bn itself, mainly via a planned £13.5bn rights issue. The extra government money given to it, equating to a 43.5 per cent taxpayer stake now, is expected to further help the bank repair its battered finances following its takeover of the troubled HBOS group. The total £42.7bn in this second bail-out package for the banks exceeds the £37bn originally given to the sector at the height of the banking crisis a year ago.

In an attempt to assuage public anger over the second bail-out both RBS and LloydsBG have agreed not to pay any cash bonuses to staff earning more than £39,000 for 2009 performance; a limit of £2,000 will also apply for junior staff. For higher up executives' bonuses will be in shares, which directors will not be able to touch until 2012. Others however can merely sell the shares to get their bonus in cash form, so how effective the strategy will be is debatable.

Structurally, the forced sell off of 318 branches by RBS, plus its cash rich RBS Insurance and Global Merchant Services card payment business, and the 600 branches lost by LloydsBG, alongside its mortgage broker Cheltenham & Gloucester and Intelligent Finance online business, will have the biggest impact on the ground with new entrants like Virgin, Tesco, and others expected to consider buying some of these facilities. This would open up the profitable UK retail banking arena to more competition and potentially present IT vendors with opportunities to win business for new integration software and core banking systems. Although as many of the new banks will simply be brands that are sold off from the parent companies to act as standalone businesses, how much changeover work will actually be required is unclear. Certainly, if Tesco were to snap up some of these branches and customers it would be interesting to see how they might be able to find synergies and cross-selling opportunities with the data held on their loyalty card schemes. For more on this and the changing branch banking scene in the UK please see the Retail Banking Supplement in the Nov-Dec09 edition of FST Magazine. Subscribe HERE

The banks have four years to dispose of the branches said the driving force behind the move, European Competition Commissioner Neelie Kroes, who negotiated the break-up in consultation with the UK government. RBS will lose all of its branches in England and Wales - originally branded Williams & Glyn's - and the NatWest brand will disappear from Scotland. RBS will lose 14 per cent of its retail banking network and its commodities trader, RBS Sempra Commodities. Lloyds' 600 'lost' branches represent about 4.6 per cent of the total UK current account market. The bank says the sales, including C&G and Intelligent Finance, account for about £30bn of customer deposits and £70bn of lending, generating income of £1.4bn in the year to December 2008.

Job losses
• Separate from the above announcements, RBS has also said that it is to axe 3,700 branch staff in a bid to cut costs. The reduction in customer-facing employees was unveiled prior to the news that it will have to sell off branches, so the announcement presumably still stands. RBS is also set to spend £5bn on IT over the news five years. According to Stephen Hester, the bank's chief executive, speaking at a BoA Merrill Lynch conference in London, the money will go into improving the integration of previously acquired businesses.

LloydsBG has also latterly revealed that it is to cut jobs as well, with 5,000 more expected to go by the end of 2010, just over half of them permanent positions in the UK, with the rest coming from temporary staff or contractors. The job losses are focused on the operations unit, which includes IT, collections and payment services, where 1,350 permanent jobs are going. Almost a thousand will be lost from the insurance division, with the retail and mortgage areas making up the difference.

• In other news, Northern Rock is to be split in two after the EU approved plans for the nationalised bank to be become a 'bad bank' and a 'good bank'. In a further move to sort out the mess created by the banking crisis in the UK one business, described as the 'good bank', would hold savers money, undertake new lending and hold some existing mortgages. A second 'bad bank' will be set up to hold the toxic mortgages, where defaults are more likely, and repay outstanding government loans as and when this becomes possible. Critics of course remain concern that the money will never be repaid, leaving the UK taxpayer with a large bill.

The state-owned Northern Rock said that the EU approval was "an important and positive step" but reiterated that the announcement would not affect ordinary customers for whom business would "continue as normal". The restructuring is expected to take place before the end of the year.

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