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Will HBOS stay independent?

• Robert Peston
• 8 Nov 08, 03:57 PM

Some 2m small shareholders in HBOS and many thousands of HBOS employees may hope the two Scottish banking knights' plans to preserve the bank's independence receive a proper hearing - although there is no guarantee that what they propose will enhance the wealth of HBOS investors or the job prospects of HBOS staff.

But it's impossible to ignore the very formidable obstacles faced by Sir Peter Burt and Sir George Mathewson. The odds of them pulling it off are pretty slim (see my earlier note, HBOS takeover challenged, for the relevant background).

First there is the question of whether a bank with HBOS's exposure to the battered British housing market and with its dependence on flighty wholesale funding can be seen as a terribly attractive standalone business: whether it is viable in a very basic sense.

This is what Alistair Darling, the Chancellor, said last week to MPs about what would happen to HBOS if it wasn't taken over by Lloyds TSB:

"HBOS...both will have to go back to the FSA and we will have to recalculate the capital requirements and proceed accordingly. However, you should look at what the OFT report says about HBOS because it makes it clear that the most likely outcome without the merger would not be a strong, independent HBOS continuing to exist and exerting the same competitive pressures as it was in the past, because it recognizes that HBOS has a number of problems...You should look at the OFT report because it did make the point that if this does not go ahead, it does not mean that HBOS is out of the woods. Far from it; it still has very substantial problems we need to resolve."

Those are not the words of a Chancellor enthusiastic about HBOS's future as a standalone business.

Then there is the matter of how much additional capital HBOS would have to raise from taxpayers if it remained independent.

Mathewson and Burt think it would be not be very much, a few hundred million pounds (not trivial for most of us, but smallish relative to the 拢11.5bn that HBOS is already being forced to raise from the Treasury).

My Government sources say that the Financial Services Authority, the City watchdog, would probably require an independent HBOS to raise considerably more than Mathewson and Burt appear to believe to be the case.

And my sense is that the Treasury is not keen to put more taxpayers' money into HBOS.

In that context, it is relevant that Burt and Mathewson have not raised a bean of new capital to inject into HBOS.

Finally there is the unseemly issue of politics. In March of last year, Mathewson wrote this to the Scotsman newspaper: "I do not share the fear of independence which is currently being fostered by those who have most to lose by a change in the status quo and those who see Scotland as a source of safe seats thus guaranteeing their rule over the UK."

That is the sort of thing that the UK's pro-Union Prime Minister tends to notice. And Gordon Brown has been very publicly pro another union, that of Lloyds and HBOS.

The chances of the Prime Minister abandoning his backing for the takeover by Lloyds of HBOS are, I would estimate, slim to none.

UPDATE 17:00

Lord Stevenson, HBOS's chairman, has now replied formally to Mathewson and Burt, He has written to them that his board sees "no basis for future discussion" - which can be paraphrased as "hop off".

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HBOS takeover challenged

• Robert Peston
• 8 Nov 08, 09:10 AM

A pair of the best known and most respected bankers in the UK, Sir Peter Burt and Sir George Mathewson, are attempting to blow up the takeover of HBOS by Lloyds TSB.

Burt and Mathewson - the former chief executives of Bank of Scotland and Royal Bank of Scotland respectively - are convinced that HBOS and its shareholders would be far better off if the bank were to remain independent.

Their intervention will be difficult for the board of HBOS to ignore, not least because Burt is credited with creating HBOS. He was chief executive of Bank of Scotland when it merged with Halifax to form HBOS.

Burt and Mathewson are persuaded that HBOS would be viable as an independent, thanks to the massive taxpayer support offered to all the banks in October by the Treasury.

They have today written to the chairman of HBOS, Lord Stevenson, saying that he and the HBOS chief executive, Andy Hornby, should resign with immediate effect - and that Mathewson should become the new chairman of the bank and Burt should be its chief executive.

Their letter says: "It is our intention to create a detailed alternative plan that we believe will represent better value for both the HBOS shareholders and stakeholders alike by keeping HBOS as an independent bank".

If the board of HBOS were to refuse to appoint Mathewson and Burt, they plan to "canvass shareholder support with a view to requisition an EGM (an emergency shareholders' meeting) to seek your and Andy Hornby's removal from the board" - and their appointment.

Burt and Mathewson would stay in post long enough to ensure that HBOS was once again perceived to be on a sound footing. They would commit to recruit new credible management for the top positions at the bank, to make themselves redundant just as soon as the bank's owners felt that was prudent.

Their initiative may be particularly welcomed in Scotland, where there has been widespread concern that the takeover would lead to significant job losses and could damage the position of Edinburgh - the location of HBOS's historic and imposing head office - as a financial centre.

The Scottish National Party has been highly critical of the takeover.

By contrast, Lloyds TSB's proposed acquisition of HBOS has been supported and facilitated by the prime minister, Gordon Brown.

When announced in September, the takeover was effectively a rescue of HBOS, which had lost the confidence of many of its creditors.

The argument of Burt and Mathewson is that HBOS no longer needs to be rescued by Lloyds TSB, because the Government and Bank of England has offered vital funds to replace those that could be withdrawn by money managers and other creditors. "In the light of new capital from HMG for HBOS, the takeover is no longer necessary to ensure financial stability", their letter says.

They also contend that the terms of the takeover massively undervalue HBOS. The letter adds: "HBOS shareholders should be receiving more than 1 Lloyds share for every HBOS share rather than the 0.605 to which Lloyds have reduced their offer".

One complication is that both Lloyds and HBOS would be forced by the City watchdog, the Financial Services Authority, and by the Treasury, to raise more capital than they are currently doing, if the takeover were not to take place - because they would both be perceived as weaker as independents than if combined together in a new superbank.

The Treasury is currently offering to provide 拢11.5bn of capital to HBOS and 拢5.5bn of capital to Lloyds TSB.

The Government might not be delighted if it was forced to provide more taxpayers' funds to the two banks.

However, Burt and Mathewson believe that HBOS would require very little additional capital, perhaps a few hundred million pounds, whereas Lloyds has announced that as an independent it would need an extra 拢1,5bn.

The competition authority, the Office of Fair Trading would be pleased if the takeover collapsed, because it fears that the combination of the two banks could make the British banking market less competitive, to the detriment of consumers.

UPDATE 11:10

The big imponderables are:

1) whether this intervention will cause anxiety for those who finance HBOS, whether it will cause an erosion of deposits and credit lines, and thus shake the stability of the bank;

2) whether the Treasury would be prepared to commit additional capital from taxpayers to support the banks as independent entities.

If the Treasury won't back them as independents, or if the possibily of the deal not happening appears to be damaging HBOS (or Lloyds TSB), then the authorities will instruct the two venerable Scottish banking knights to ride away into the sunset.

UPDATE 17:00

HBOS has now formally told Mathewson and Burt to hop off. The chairman, Lord Stevenson, has written to them saying he sees "no basis for future discussion".

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