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Once the chaos of the last few weeks eases and everyone gets a chance to sort through the rubble, one thing will be clear: The dominant members of the financial system that emerges will be British retail banks such as Barclays Plc., HSBC Holdings Plc. and Lloyds TSB Group Plc. Other internationally-minded European lenders too may do well as the US dominance of financial markets fades.
That’s not the conventional wisdom. To most people, the British economy looks the most exposed to the fallout from the credit crunch. And there is a lot of truth in that view. The UK is experiencing a nasty slump in its property markets. Government and personal debt levels are out of control. With unemployment rising as well, a recession looks certain. It might be years before we see economic growth again.
All of that will hurt the banks. As mortgage debts start to turn sour, as they surely will, they will be left with more bad debts. All of them will have to raise fresh capital. JPMorgan Chase and Co. this week predicted that three of the main British banks—Barclays, Lloyds and Royal Bank of Scotland Group Plc.—would need to raise £38 billion (Rs3.2 trillion) between them to get through the economic decline.
And yet, economies don’t always develop the way people expect. Just as Germany and Japan emerged, rather surprisingly, as the big economic winners in the post-World War II boom, so the UK financial system may do well from the credit crunch.
Just take a look at three of the British beneficiaries of the financial meltdown of 2008.
Barclays has just bought the North American business of Lehman Brothers Holdings Inc. for $1.75 billion (Rs8,015 crore). In five years’ time, that will look like the bargain of the century. It establishes Barclays as a major force in US capital markets for what would have seemed like small change a year or so ago.
Unless you believe the US economy is finished forever, that is a big step. Of all the world’s banks, Barclays is the only one so far that has had the guts to play vulture. Business, like most fields of human endeavour, favours the brave. The chances are that Barclays will be richly rewarded.
Next, take Lloyds. Last week, it took advantage of the market chaos to merge with HBOS Plc. The headline price was £10.4 billion, yet Lloyds is paying with shares, so no cash is changing hands. And it is buying HBOS equity that has been savaged by short-sellers. At the start of this year, HBOS shares were about 730 pence, compared with less than 200 pence when Lloyds swooped. Normally, the deal wouldn’t have been allowed. Amid the turmoil of last week, the government is suspending competition rules to allow it to go ahead.
The result will be a bank with a dominant position in the UK savings-and-loan market. Between them, Lloyds TSB and HBOS will have a 28 % share of British mortgages. Sure, in the short term it will take a hit as UK property slumps. As real estate values stabilize, however, Lloyds’s dominant position will bring huge profits in the UK market.
That will be bad news for British savers and borrowers, who have just seen competition in the mortgage market virtually abolished. But it will create an immensely powerful global bank with a protected home base. For a comparison, think about the Japanese car industry, which conquered the world from a home market shielded from competition. Lloyds-HBOS could be about to become the Toyota Motor Corp. of global finance.
A third big British bank, HSBC, has sailed through the crunch largely unscathed. HSBC shares have held their value this year. There must be a lot of banking chiefs who would sell their children for that kind of performance during 2008. As its rivals get cut down, HSBC just looks stronger and stronger.
The only major UK bank that looks weakened is Royal Bank of Scotland. It took control of ABN Amro Holding NV’s investment banking and Asian units last year at a price of €14.3 billion (Rs96,239 crore today). That now seems to have been the market peak. After all, that sort of money would buy you a lot more bank now than it did 12 months ago.
The capital market that emerges from the credit crunch is likely to be dominated by big retail banks, with relatively small and conservative investment banks attached to them. Of the old US investment banks, only Goldman Sachs Group Inc. might survive, and even that is doubtful. Goldman, after all, has just accepted regulation as a bank holding company. There won’t be a meaningful investment banking industry anymore.
The Europeans have far more experience of linking retail and investment banking than any of the US lenders. They have been doing it for generations. For the French, German and Spanish banks, there won’t be much to learn. They already know how to combine the two disciplines. But it is the British banks that will have the most chance to seize the moment and become the strongest in the world.
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