There are two ways to look at Lloyds Banking Group’s £1.9bn purchase of the MBNA credit card book from Bank of America. The first is to applaud Lloyds’ escape from the hell of restructuring and provisioning. The bank hadn’t made an acquisition since the miserable crisis-era grab of HBOS, the deal that came with a state-sponsored bailout. Now its board can buy assets again, rather than obsess about detoxifying the balance sheet.
This cheerful interpretation is not to be sniffed at. Lloyds has taken £17bn in provisions for mis-sold payment protection insurance since 2011, sold most of its operations outside the UK, demerged TSB and cut costs. The exercise has been a success and the contrast with Royal Bank of Scotland is stark. The Treasury’s stake in Lloyds has been cut to 7%, and could be zero within six months. At RBS, the state is stuck at 73%.
Yet Lloyds’ MBNA purchase should also provoke groans. It does nothing to promote competition in an industry that already looks too concentrated. Regulators tend not to fret about credit cards, a corner of the market in which customers genuinely shop around, but this deal will make Lloyds, the biggest banking beast in the land, even bigger. Biodiversity will be marginally reduced.
Look at the shares Lloyds enjoys already: 25% in current accounts; 21% in mortgages; 22% in retail deposits; 19% in lending to small and medium-sized businesses; and 17%, and rising, in car loans. Credit cards were an outlier, relatively speaking, in that Lloyds’ share was 15%. The MBNA purchase, however, will take the figure to 26%.
Is this healthy? From Lloyds’ point of view, the purchase is clearly beneficial. There are risks attached to buying a slug of unsecured UK consumer credit ahead of next year’s likely squeeze on real incomes, but Lloyds can afford to take a punt others could not. The MBNA operation in the UK made post-tax profits of £250m last year and Lloyds can find £100m in savings (or £80m after tax) by combining overheads. That is why it can forecast a 17% return on investment in the second year of ownership. That potential juicy prize is quite enough to justify the risk of a rise in defaults. Lloyds’ shares improved 2%.
But the lack of competition should concern us all. Lloyds won the auction for MBNA, one suspects, through sheer size. No other bank or private equity player could make the same cost savings, and almost none enjoyed the same funding advantages. From a competition perspective, it would have been better if MBNA had entered up with, say, Santander, a bank that causes occasional headaches for the big four lenders.
In place of stiffer competition, we have Lloyds’ cheeky promise to make MBNA its “challenger” brand, the same label it slaps on Halifax in retail banking. It’s a nonsense: when you are a quarter of the market, you are the establishment.
Sadly, reform is hard to imagine. The woes of RBS have destroyed any political appetite for a structural shakeup of retail banking to promote greater competition.
The disgracefully timid report from the Competition & Markets Authority in the summer provided an excuse for inaction. One of these years, though, Lloyds’ dominance will come to be seen as a real problem.
Blood from BHS pension deficit not only on Green’s hands
Make no mistake: Sir Philip Green remains responsible for the deficit in the BHS pension funds, which stood at £571m at the last count. If a man with a supposedly keen eye for detail had addressed the deficit in his early years of ownership of BHS, when a relatively small increase in contributions could have made a meaningful difference, he would not now be the most despised business figure in the land.
But it also true that Green’s failure to take responsibility did not happen in a vacuum. The system of pensions regulation failed. In 2012, the BHS pension trustees inexplicably signed off an arrangement whereby the company would take a leisurely 23 years to close a deficit that then stood at £200m. The Pensions Regulator should have screamed foul. Instead, it woke up only when BHS was close to death.
Frank Field’s work and pensions select committee is therefore right to call for the Pensions Regulator to be reformed to become “a nimbler, more proactive” organisation that intervenes sooner when deficits appear. Recovery plans of more than 10 years should be “exceptional”. Quite right. And it is vital that the regulator should have powers to block takeovers when pension deficits are large. If such a rule had been in place, Green would surely not have been allowed to sell BHS to the thrice-bankrupt Dominic Chappell.
Field’s other idea is that Pensions Regulator should be armed with a “nuclear deterrent” in the form of punitive fines. That is more problematic. If the regulator does its job properly and makes fair and timely demands of corporate sponsors, is there really a legal basis for hefty fines on top? Such a system may just complicate legal wrangles, and give future Philip Greens more reasons to deploy delaying tactics.
But the rest of the committee’s recommendations hit the mark. The Pensions Regulator needs more powers to intervene earlier – and it should be told to pull its finger out and use them.
