Banking: Does NBNK have more hope than expectation?

Research generally shows that bank customers are more likely to leave heir spouse than their bank. Except in Nigeria, apparently, where bank consolidation demonstrated that merging branches, even those only a few door apart, led to customers deciding that the new bank wasn't "their" bank and looking for options.

NBNK is bidding to buy some of the branches that Lloyds Banking Group (not connected to Lloyds of London) is being forced to sell off as a result its ill-considered takeover of HBOS which left it with a hugely dominant market position in retail banking in the UK.

To its credit, Lloyds has not simply transferred all the HBOS assets and liabilities into a bad bank and let it sink - a course of action that must have appeared highly attractive from time to time.

And that must have seemed even more attractive when, in addition to sorting out the HBOS problems, handling the long-tail regulatory problems at HBOS and now being told that it has to get rid of hundreds of branches in order to dilute its position.

Lloyds has to dispose of the premises, and some of its customers. In short, this is a disposal of part of the business.

Prior to taking over HBOS at the instigation of then Prime Minister Gordon Brown who sidestepped competition rules only to have them come back and bite Lloyds on the bum, Lloyds had a small branch network compared to, say, Barclays or NatWest (part of the Royal Bank of Scotland - RBS - Group).

But it had the Cheltenham and Gloucester brand (which despite converting to a bank and being taken over by Lloyds several years ago still bore all the physical hallmarks of a building society rather than a bank per se) and the addition of Halifax and Bank of Scotland branches gave Lloyds far more branches than it needs to handle its customer base.

Indeed, Lloyds led the charge to centralising back office services and Sir Brian Pitman once told this writer that his plan for branches was that they would become front offices primarily for sales purposes.

Too many branches can create diminishing returns: customers need access to ATMs and Kiosks more than to branches for their routine financial transactions. So long as the Nigerian effect does not afflict Lloyds, disposing of premises where there are multiple branches is probably a positive step.

But who would want some 600 redundant bank branches, even if they do come with staff and some customers?

Surprisingly, there is a queue. Sun Capital and Co-Operative Financial Services have expressed an interest along with new bank NBNK.

Sun Capital is a venture capital firm backed by entrepreneur Hugh Osmond who made his first fortune with the Pizza Express chain. But there are reports that Sun is also interested in taking over most of the UK business of National Australia Bank which owns the Clydesdale and Yorkshire banks. Whether it continues with its interest in the Lloyds branches remains to be seen.

NBNK's bid is led by Gary Hoffman - former CEO at Northern Rock, parachuted in by the UK government from Barclays in 2008 to try to stave off complete collapse and turn the Rock into some kind of stable and saleable asset. He succeeded Ron Sandler who had lasted four months as the Rock's CEO and went on to be its chairman. Hoffman presided over some 2.500 job losses - far less than many had expected as the Rock slid into disaster. When he left to join NBNK, in November 2010, Hoffman refused contracted remuneration of GBP500,000 - and NBNK agreed not to bid for Northern Rock assets for a year - thereby effectively buying Hoffman out of a gardening leave provision in his contract.

Now Hoffman is CEO of NBNK with a plan to create a mid-size bank. On some figures, if NBNK picks up all 630 branches that Lloyds is disposing of with the customers that must go too, it will instantly become the UK's seventh biggest bank.

And it will do so at what appears to be a remarkably low price: as little as GBP1,500 million is reported to be the kind of figure that the parties have in mind.

That leaves two issues: will customer be more loyal to the bank or to their branches? NBNK is going to need to do a sales pitch in relation to depositors: borrowers will be left with much less option because debt can be sold while deposits cannot.

The experience of disposing of assets of failed banks in the USA is that it is extremely rare for any premium to be attached to the sale of deposits. "Assets" as in debt are generally being discounted. And no premium is being paid for premises in most cases: in short, in the USA, it seems that there is no "brand value" in a branch which is going to be renamed.

NBNK has other issues to face: suddenly becoming responsible for several million customers brings with it a host of headaches from compliance through risk management and customer relations to say nothing of the boring matter of doing the day-to-day management of accounts. That requires a mass of technology which, at present, NBNK does not have. Nor does it has the people to manage such a large project.

Then there is the tedious issue of replacing ATM cards, debit cards and so on. Lloyds will not want NBNK customers wandering around waving its cards when it doesn't hold their accounts. Unlike many of the US bank takeovers, this is not going to affect only a couple of thousand customers.

Complaints handling will be a major challenge: no matter how well the transition goes, millions of customers will find something to moan about. And Lloyds standard response to the transferred customers will be something like "sorry, we really don't know: it's not our fault we were forced to abandon you." Complaints handling at the new bank may well turn in to firefighting as customers move back to Lloyds - a move to a completely different bank will be more complicated because of customer due diligence processes to satisfy counter-money laundering requirements.

Even borrowers may want to return to Lloyds who may be able to "buy" them back with concessionary deals.

The purchase of the branches is predicated on the basis that there must be sufficient good business in place and that it will stay.

While there is hope that it will, that may be a long way from expectation. Whoever takes over the Lloyds branches will need to attract new, high quality, business fast. Unfortunately, that's exactly what every other bank is doing.

Recent new banking ventures in the UK do not have a happy history. For example, internet bank Egg has recently been sold (by Citi to Yorkshire building Society - not, note, Yorkshire Bank referred to above) having been owned by a succession of institutions none of whom have made it into much more than a funny brand name.