Britain's largest retail bank Lloyds faces an uncertain future ahead of an imminent EU ruling that could force it to carve up its current structure and potentially sell all or part of its key Halifax unit, analysts said.
Neelie Kroes, competition commissioner for the EU's executive, has yet to make a final decision, but the Times said yesterday that Lloyds could be forced to carve off Halifax, Britain's biggest mortgage provider - effectively unpicking the takeover earlier this year of rival HBOS, which owned the unit.
One source familiar with the situation told Reuters that Lloyds had not yet received detailed indications from Brussels, and it was too soon to predict a final ruling.
But the newspaper, quoting banking sources, said Ms Kroes's plans to impose tough penalties would force the bank to go well beyond plans it has long been expected to carry out - including selling its 164-branch Cheltenham & Gloucester arm and making disposals in Scotland.
"What (the Commission) are talking about Lloyds giving up sounds a lot like Halifax," the newspaper quoted one person close to the negotiations with Brussels as saying.
The paper said Lloyds, keen to hold on to the Halifax name, could offer up 1,000 branches for sale as a compromise.
A Lloyds spokesman said the bank declined to comment on speculation. Ms Kroes's spokesman also declined to comment.
"If you had to sell off Halifax, the whole game changes. Halifax retail is probably about 20-25 per cent of pre-impairment profits in 2010 and the synergies (from the HBOS deal) all go out the window as well," analyst Mike Trippitt at Oriel Securities said.
"This completely impacts Lloyds' operating profit. It was a (takeover) deal, rightly or wrongly, done to save HBOS and to stabilise the UK banking system and now they have to get it done and eliminate uncertainty."
Lloyds shareholders also aired their concerns.
"The attraction of doing the deal at the time, (when) there were clearly a lot of risks, was you were getting to circumvent the normal competition rules. So to have taken the downside and to have the upside stripped away from you, that's not very good," said one top-10 shareholder who declined to be named.
"I am sure this will be a big concern for them."
Kroes has made no secret of her plans for tough measures for both Lloyds, 43 per cent owned by the UK state, and Royal Bank of Scotland, 70-per cent state-owned. In June, she had already cited "problems" with Lloyds' share of the UK retail banking market.
Halifax is one of Britain's strongest high-street banking brands and a cornerstone of Lloyds' home loans business. Lloyds became Britain's top mortgage lender, responsible for roughly one in three home loans, after it bought HBOS earlier this year.
Lloyds also holds the lion's share of Britain's current accounts, with just over a third of the market.
"Inevitably, the ultimate result will be somewhere in the middle of the two extremes - the Commission threatening to rip out Halifax and Lloyds offering up C&G, which has just 164 branches, and branches they were willing to shut down (until last month)," said one analyst who declined to be quoted.
The EU's executive told Reuters yesterday that it was just weeks away from having all the information it needs to make a decision on the bank and its plans to use a government-sponsored asset protection scheme to protect it against further losses.
Ms Kroes will leave her job as early as next month with the end of the current Commission's term in office.
"In one scenario, (the ruling) could be quite draconian. In another, it could be quite benign. There could be potential buyers of the assets, it doesn't necessarily have to be value-destroying," a second source familiar with the situation said.
But finding buyers for Lloyds' asset could be a potential problem in turbulent times. Spain's Santander has long been seen as a potential buyer, but is unlikely to satisfy EU concerns, particularly surrounding Halifax, as it is already number two in the UK mortgage market.
Lloyds shares were up 3.2 per cent at 108p at 0856 GMT today as traders said it was shrugging off sales that were "already in the price" and riding the tide of a rising market.
The British government acquired its stakes in Lloyds and RBS as part of a taxpayer-funded bailout worth £37 billion last year as both banks struggled with soaring losses on risky credit-backed assets.
The two banks are now seeking to transfer more than half a trillion pounds of problem loans to the state under the UK's asset protection scheme.
Reuters