Alliance & Leicester takeover could signal an end to UK banking competition

21st July 2008
By IB Staff Writer

Banco Santander announced on July 14 that it had, rather hastily, agreed a deal to take over Alliance & Leicester for a reported GBP1.2 billion. While regulators welcome the move, the deal also symbolizes another nail in the coffin for innovative competition in the UK banking market.

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Banco Santander has clearly got itself a bargain. The ninth-largest mortgage lender in the UK and, according to Datamonitor research, one of the top 10 banks that UK consumers go to for a mortgage deal, was sold for a measly GBP1.2 billion in an almost overnight deal which was announced on July 14 (pending regulatory approval of course). The move will boost Santander's interests in UK retail banking, as Alliance & Leicester (A&L) will likely be merged with the Spanish behemoth's other UK subsidiary, Abbey.

The deal was reportedly welcomed by the financial services regulators, under increasing pressure to ensure a healthy and robust UK banking system in the wake of Northern Rock's recent collapse. A&L's executives seemed to think that the bank's floundering share price could not return to previous levels and, with vultures circling, took the path of least resistance.

It is likely that Santander will roll A&L up into Abbey to complement its branch network. At last count, A&L had approximately 250 branches, which will be rebranded to bring Abbey's network up to around 1,100 branches in total. This definitely brings Abbey into the "big five" territory: the smallest of the large UK banks, HBOS, currently operates around 1,300 branches across the country. Datamonitor research reveals that only Halifax will stand in Abbey's way to being the UK's largest mortgage lender. A&L and Abbey enjoyed a combined 13.4% of market share of gross advances in 2007.

Still, let's take a moment to mourn the loss of one of the great innovators in UK banking. After demutualizing just over 10 years ago, the Midlands-based bank has launched a host of truly innovative, and very competitive, current account products which one would not ordinarily find on the high street. It has been named as Business Banking Current Account Provider of the year for five years running, and was the first bank in the UK to start operating under the new Basel II capital rules. It limited its reliance on the wholesale money markets for mortgage funding, yet the announcement of a comparably small loss seemed to disproportionately contribute to its downfall.

It is this "little big bank" that has kept the big five on their toes in terms of product innovation, and as Abbey swallows A&L up, experts are concerned that the UK banking industry will bloat and lose agility even further. Free-market competition will lose itself somewhere between the large UK players and the building societies: that no-man's land where a small handful of banks still exist, but probably not for long. In fact, the market already seems to have focused in on its next victim, Bradford & Bingley. With the FSA even stepping up to broker a takeover of this struggling bank, it is only a matter of time before the market consolidates further.
'End Intelliext

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