UK banking gets set for new third force

Looking back just a few years, Lloyds Bank was just a tiny bank, compared to Barclays, National Westminster and Midland. Lloyds was old fashioned, and its bank branches were, for want of a better word, like banks.

Outside the banking sector, building societies were growing into bank-like outfits and Halifax, Bradford and Bingley, Alliance and Leicester and Northern Rock were all developing aggressively. Increasingly, Lloyds - with its consumer and small business lending - looked like the forgotten bank.

All that changed in the 1980s when deregulation in the market led to a flurry of takeovers. Lloyds, somehow, always managed to stay out of the grasp of acquisitive rivals. It took over the Trustee Savings Bank (hence the group becoming LloydsTSB) in 1995 and Scottish Widows insurance company. When Cheltenham and Gloucester Building Society decided to de-mutualise, LloydsTSB took that over, too. It began its own estate agency, and even ventured into the provision of conveyancing legal services.

Lloyds was formed in 1765 in Birmingham, England and the forerunner of TSB in Scotland in 1810. Foreign development was largely halted and New Zealand and South American units were sold off.

When current chairman Sir Victor Blank, a personal friend of Gordon Brown, was appointed, the Guardian said that he took the post "amid investor concern about how the group will increase revenues in a tough UK banking environment after previous management relied on takeovers and cost cuts in the 90s."

Indeed, in 1998, Sir Brian Pitman, then chairman of LloydsTSB told our own Chief Executive, Nigel Morris-Cotterill, that his plan for banking was to develop branches into sales offices with management and back office work handled in regional centres. That set the tone for branch redesign and a management systems shake-up intended to deliver the results of the mantra emanating from Board Rooms across the UK: increase shareholder value.

Lloyds tried to buy Abbey, but was rebuffed. Later that former building society found itself in both regulatory and financial hot water and was sold to Santander in what some saw as a fire sale.

For five years, from 2001 to 2006, Lloyds was relatively quiet on the acquisition front but it did consolidate its management processes and its basic businesses. And it built up a cash pile whilst being more prudent with its investment and lending policies than many other financial institutions.

But the arrival of Victor Blank was to reinvigorate the smallest of what had once been the big four but had grown to five with the emergence of Halifax from its Building Society base followed by its audacious takeover of Bank of Scotland (formed in 1695) to form HBOS and Royal Bank of Scotland's swallowing of National Westminster which brought with it Coutts.

Blank was formerly with Charterhouse, an investment bank, where he had a reputation as the maker of impossible deals. Two years after his arrival at LlloydsTSB, he was to put together a deal that no one would have expected even just several weeks before.

Ignoring the benefits of his political connections, Blank's offer for HBOS was seen as a good thing - for about 24 hours. Then HBOS' share price plummeted and kept falling. Word sneaked out of the target's offices that the bank was not just on its uppers but on the verge of total insolvency. How true that was remains to be seen but the flurry of activity to keep it afloat long enough to be rescued suggests that it was not far from the truth.

And then the UK Treasury made its announcement on shoring up the banking system - only to tell both LloydsTSB and HBOS that money would be made available to them only if the takeover happened. That was probably a bluff, but LTSB shareholders promptly voted in favour although, as the offer was revised, some HBOS shareholders rebelled.

But a decision on 11 December to bring LTSB and HBOS together put the deal back on track for a formal conclusion in Mid January 2009.

At that time, what amounts to a new entity will come into being: Lloyds Banking Group, of which some 43% will be owned by the British government through its bank rescue scheme.

And in name, at least, the little bank that could, will have come a full circle and in doing so climbed to be the UK's third biggest banking group behind HSBC (which took over Midland and as a condition of being allowed to do so had to move its official headquarters to the UK from Hong Kong) and RBS (now effectively state owned).

But those others are big by virtue of their overseas operations: Lloyds will be by far the biggest UK banking operation with almost than one third of the entire UK mortgage market and some 3,000 branches.

That number will drop dramatically: in a statement before the takeover was approved, Lloyds TSB said ""significant cost savings can be made by combining the networks and back offices of Lloyds TSB and HBOS whilst creating the largest and most effective retail franchise in the UK"

Many high-streets already have four branches reflecting the retail brands of the new entity: Halifax, Bank of Scotland, LloydsTSB and Cheltenham and Gloucester (which is a pure sales operation). There will be amalgamations of branches and although job numbers have not been made public rationalisation across the branches and support divisions will inevitably mean reductions in staff levels.