Lloyds branch bidders may also target Northern Rock

LONDON: Bidders targeting the 600 branches being sold by Lloyds Banking Group might view it as the opening salvo in a campaign leading to a bid for nationalised bank Northern Rock.

Last week, Virgin Group head Richard Branson said Virgin Money would consider bids for both Northern Rock and the Lloyds branches, which Lloyds has been ordered to sell by regulators as payback for taking a state bailout during the credit crisis.

New bank venture NBNK has expressed an interest in both assets, while the likes of National Australia Bank UK and supermarket retailer Tesco's banking arm are also seen as contenders.

Analysts said it could make sense for interested parties such as Virgin Money and NBNK to look to snap up both assets.

Whoever buys the Lloyds branches would have to tackle funding problems associated with those assets, but that could be solved by buying Northern Rock and using Northern Rock's deposits and infrastructure to plug that funding gap and iron out any software integration issues.

"If NBNK or Virgin were to buy the Lloyds branches, it would give them the incentive to then buy Northern Rock," said Mediobanca analyst Christopher Wheeler.

"Northern Rock is an infrastructure machine, and they've got deposits," he added.

The disposal of the Lloyds branches and Northern Rock are part of a planned broader shake-up of Britain's banking industry in the wake of the credit crisis. Analysts say the Lloyds assets could be worth about 3 billion pounds ($4.8 billion), while Northern Rock could fetch 1 billion.

Along with having to fully nationalise Northern Rock during the crisis, Britain also had to bail out Royal Bank of Scotland and Lloyds, finishing up with an 83 percent stake in RBS and a 40.6 percent holding in Lloyds.

Britain's Independent Commission on Banking (ICB), set up last year to examine reforming the sector, proposed in an interim report in April that Lloyds should sell more than 600 branches to boost competition in the industry.

The ICB also said the Lloyds branches could be combined with the Northern Rock sale to create one big new bank.

Analysts said Lloyds could use the planned sale of Northern Rock in its fight to fend off the ICB's proposal for it to sell even more branches, and could itself push for a sale of both assets to one buyer.

"It would be great if Northern Rock and Lloyds were pushed together," said West LB analyst Neil Smith.

"It would suit the government by creating a big new entrant and it could suit Lloyds as it might make the Independent Commission on Banking less insistent about Lloyds having to sell more than the 600 branches," he added.

There has been widespread interest from potential buyers of both Northern Rock and the Lloyds branches.

Along with banking groups, mutually owned British savings firms -- known in the UK as "building societies" -- such as Coventry Building Society and Yorkshire Building Society have expressed interest in Northern Rock.

Analysts also see private equity firms such as JC Flowers or Blackstone taking a look at Northern Rock.

Sources with knowledge of the matter have told Reuters that Lloyds has already sent out an information memorandum for the sale of its branches, and there has been market speculation that foreign banks have expressed an interest in those assets.

Analysts say French banks such as Societe Generale and BNP Paribas might be interested in the Lloyds assets.

There has also been speculation that Qatar, which has said it could invest in RBS and Lloyds, might have a look, too, along with Bank of China and Industrial & Commercial Bank of China.

However, analysts said it could be hard for such foreign banks to get boardroom approval for this type of overseas acquisition, given the fragile nature of the UK economy.

"It will be much more difficult for them to get their boards to approve something as risky as this, which is a bet on the UK economy," said Mediobanca analyst Wheeler.

They added that Virgin appeared best placed to get both Northern Rock and the Lloyds branches, given the relative strength of the Virgin brand in Britain over that of foreign banks, private equity firms or start-up banking ventures such as NBNK.

"The Virgin brand is quite powerful, said Espirito Santo analyst Joseph Dickerson.

Copyright Reuters, 2011