Lloyds Banking Group has come a long way since the British taxpayer was forced to stump up £20 billion (€23.7bn)to rescue it at the height of the financial crisis.
In its first major acquisition since those dark days, the bank is buying the MBNA credit card business from Bank of America Merrill Lynch for £1.9 billion (€2.25bn).
MBNA is one of the UK’s largest credit card issuers, with some seven million customers and £7 billion of assets, or credit card debt. The business issues official cards for leading football clubs, including Chelsea, Arsenal, Spurs and Liverpool.
The deal will take Lloyds' share of the credit card market from 15 per cent to around 26 per cent, putting the combined business almost on a par with market leader Barclaycard, which has 28 per cent.
It’s certainly good news that the bailed-out bank, in which the government still has a near-7 per cent stake, is in sufficiently good financial health to pursue expansion once again. But is this the right deal?
While analysts agree the purchase is a good use of Lloyds’ excess capital, there are some concerns over the timing of the move, which is effectively a bet that consumers will carry on spending as they have done in the past.
But while retail sales and consumer confidence have been stronger than expected in the six months since the vote to leave the European Union, will shoppers continue to flash the plastic so freely as the cost of living rises and the economy suffers its self-imposed Brexit slowdown?
And what of bad debts? Analysts noted that the deal has been struck at a particularly benign point in the credit cycle and impairments will almost certainly head higher as the economy struggles in the post-Brexit world.
There are competition concerns too. Although Lloyds chief executive Antonio Horta-Osorio appears confident the deal will be waved through, there is a risk that it will attract the scrutiny of the regulators.
Competition
While Lloyds says it will maintain MBNA as a separate "challenger" brand, offering different rates and deals for its customers, the fact is the move will see more than half the UK credit card market controlled by just two companies, Lloyds and Barclays.
Claims from Lloyds yesterday that its expanded credit card business would “compete with ourselves” are hard to take seriously.
Lloyds is Britain’s biggest mortgage lender, with a share of 21 per cent, and the MBNA acquisition will reduce its dependence on that market. Lloyds has a 25 per cent share of the UK current account market and 22 per cent of retail deposits.
The deal has been under negotiation for some time and Lloyds fought off competition from a number of rivals, including HSBC and Santander's UK arm.
One of the sticking points was MBNA’s exposure to payment protection insurance (PPI) claims, something Lloyds is extremely familiar with, having racked up the biggest bill of all the banks for the mis-selling scandal, at £17 billion and counting.
It has, however, agreed with Bank of America that MBNA’s PPI liability will be capped at £240 million, which is included in the £1.9 billion purchase price.
The broad market reaction to the deal was positive, with Lloyds shares among the biggest risers in the FTSE 100 index yesterday.
Lloyds assured shareholders it will continue to raise dividend payments, which investors had to go without for so long as the bank struggled to recover from the financial crisis. But the cost of the acquisition could well mean investors missing out on any special dividends they might otherwise have expected.
So there are concerns for Lloyds shareholders, much as they may be relieved that the group is finally putting the financial crisis behind it.
Fretting about the lack of a special dividend is a problem investors in that other bailed out bank, Royal Bank of Scotland, can only dream of wrestling with, however.
While the government is expected to offload its remaining shares in Lloyds in the first half of next year, it is still sitting on a chunky 73 per cent of RBS, with little likelihood of reducing its interest in the near future.
RBS has found the road to recovery far harder than Lloyds. It was the biggest failure in the annual stress tests conducted by the Bank of England last month and is in the process of bolstering its financial strength by £2 billion.
The bank is still embroiled in legal action from shareholders demanding compensation over losses suffered in the bank’s £12 billion cash call back in 2008. On top of that, RBS is also awaiting a potentially hefty penalty from US authorities for pre-2008 mortgage bond mis-selling.
Fiona Walsh is business editor of theguardian.com
