It is not too much of an exaggeration to say that the future of the British banking industry will be shaped over the next few weeks by one man: Mr John Vickers, the newly-appointed director-general of fair trading.
He must rule by February 23rd whether Lloyds TSB, Britain's third-largest bank, can proceed with the £19 billion sterling (€29.8 billion) cash-and-shares offer it unveiled last week for Abbey National, an offer conditional on regulatory approval.
If Mr Vickers gives the go-ahead, most analysts expect Lloyds to prevail and the industry to continue its leisurely consolidation around four big banks. If he refers the bid to the Competition Commission, the outcome would look much more uncertain.
A decision to block the Lloyds move would signal that Britain must have at least six national banking groups to preserve competition, more than any other large European country.
Most independent analysts agree there is little economic case for blocking a bid. "It may be good for consumers, though there is always a danger of banks resting on their laurels and not competing at all," says Mr James Alexander, banking analyst at Commerzbank Securities. "However, it's more likely that competition would intensify to the detriment of profitability."
Profitability is not an issue at present for Britain's four leading banks, whose returns on equity, at around 30 per cent, are the envy of much of the European industry.
Mr Don Cruickshank, the former telecoms regulator asked by the Treasury to examine competition in British banking, concluded the industry was making excess profits of £5 billion a year.
But many of the sources of that profitability are under siege from new entrants such as supermarkets, dot.com start-ups and direct selling organisations introduced by other financial services organisations.
In response, Abbey National and Halifax, another of the big four, have diversified into a fuller range of financial services. Some analysts see the encouragement of the government behind such strategies, especially in lending to small businesses - a sector Mr Cruickshank identified as in need of greater competition. The big four have more than 80 per cent of this market and the Competition Commission is already looking at ways to open it up to new entrants.
Abbey National and Halifax have both identified small-business banking as a growth area, and Abbey has been quick to claim that the Lloyds bid is an attempt to remove a potential rival. However, a combination of Lloyds with Abbey would do little to reduce current competition in small-business banking. Abbey's market share is about 1 per cent.
Nor would it add much to the concentration of payments services, Mr Cruickshank's other main area of concern, where three of the big four dominate credit and debit card services. And while a combined LloydsAbbey would have about 27 per cent of current accounts, its share of new accounts would be rather lower at 22 per cent.
The fact that it would have a falling market share in this sector is evidence of the competition from new entrants, argues Mr Peter Ellwood, Lloyds chief executive. "There are more than 130 players in the mortgage market and over 30 suppliers of current accounts," he adds.
Mr Ellwood said Lloyds first approached Abbey in autumn 1999 but was told that the former building society was intent on pursuing an independent strategy. Last November, Abbey started merger talks with Bank of Scotland, a move Mr Ellwood says showed it saw the need to join another business. The Lloyds case is that merging the two banks would produce £650 million a year in cost savings by 2005 by eliminating duplication in administration, head offices and information technology, and, after two years, closing overlapping branches. There would be a further £250 million of revenue benefits from cross-selling products, where Lloyds has one of the highest figures in the British industry, with an average of 2.3 products per customer (compared with 1.7 for Abbey). Acquiring Abbey's mortgage customers is particularly attractive for cross-selling because housebuyers tend to buy more financial services - 4.55 products on average for Lloyds.
Mr Ellwood says allowing one more round of domestic consolidation would position Lloyds well for a cross-border deal with a continental European or North American partner. Abbey rejects many of these arguments, saying the scope for cost-cutting is limited without many more branch closures. It is sceptical that Lloyds will be able to cross-sell more products to Abbey customers, as it has been unable to sell its own customers significant numbers of Scottish Widows products since buying the life assurer last year.
"They will devastate the branch network and call into question the ability to keep both brands," says Mr Ian Harley, Abbey chief executive.
As for cross-border ambitions, Mr Harley believes an enlarged Lloyds could find it harder to carry out a merger of equals with most of the likely European partners, all of which are quite a lot smaller.
Abbey has done its best to ensure the Office of Fair Trading refers the Lloyds bid for further consideration, a process that would take four to six months to complete. Fears of Abbey succeeding provided one motive for the tabling of the Lloyds offer yesterday, allowing Mr Ellwood to sell the advantages to Abbey investors who might otherwise go for the Bank of Scotland deal.
