Time to bank your gains?

By ANDREW OXLADE, COLUMNIST
Updated: 19:00 EST, 9 July 2001

LLOYDS TSB's attempt to take over Abbey National has been thwarted, but bank share prices across the board ticked higher as a result. So could it bizarrely be good news for the sector?

The fear is that the rash of takeover deals that have spurred on bank stocks may be at an end. Analysts disagree and predict which banks will be the next targets and, therefore, which will enjoy a hike in their share price.

The Government on Tuesday blocked the £18bn attempt by Lloyds TSB to swallow Abbey National on the grounds that it would reduce competition. The bid made last December would have seen Abbey's two million investors receive 1 1/2 Lloyds shares and £2.60 in cash for each share they own - a 6.5% premium on Monday's closing prices.

The decision to prevent the deal had been widely expected, which is why the shares didn't slump - the news was already factored into the price. In fact the 11am announcement actually sparked a short rally. Dealers believe that was based on nothing more than relief that there were no nasty surprises in the ruling and because of the generally upbeat mood of the markets in the morning.

Analysts agree that the decision will create a more stifling regulatory environment - bad news for banks, good news for customers. But the more important influence on share price in the short-term is whether other takeovers will be allowed.

That is because predators that eye up smaller companies can inadvertently push the share price of their target higher because speculative investors will dive in if they expect the bid to be higher than the company's market value. Takeover rumours have helped power the UK banking sector 20% higher in the last year compared with a 15% fall in the FTSE 100.

Richard Peirson, manager of the Framlington Financial fund, said: 'Big takeovers are now less likely and we've lost the speculative bubble - but we knew that was going to happen anyway and it's already in the price. But there's still a good chance smaller banks like Northern Rock, Alliance & Leicester and Bradford & Bingley will be mopped up.'

Lloyds says it will continue to hunt out other targets. Pundits suggest it will now be forced to look to Europe for a partner. Another theory doing the rounds is that Abbey could revive its talks for tie-up with Bank of Scotland - discussions were scuppered by the Lloyds bid. BoS has since agreed a share-for-share merger with Halifax.

Most observers believe BoS shareholders would prefer a shares and cash deal from another bidder. Barclays Stockbrokers analyst Henk Potts said: 'It's still all to play for with Halifax and BoS. There could also be more consolidation elsewhere in the sector, with smaller banks like Alliance & Leicester as one possible target. But the effect that will have on share prices depends on whether the deals are mergers or takeovers: there tends to be less of a premium in a merger.'

In effect, Abbey itself now has unofficial protection from UK predators. However, foreign companies can still make a move on it, which would help the share price. National Australia Bank, which already owns Clydesdale and Yorkshire banks, is rumoured to be examining a £36bn merger with Abbey. Banking analysts are taking NAB's interest in Abbey seriously. The Antipodean giant has money to spend and is keen to increase its presence in the UK after mega merger deals were ruled out in its home market. NAB is also rumoured to be keen to takeover Alliance & Leicester.

There is also the possibility that Abbey could set its sights on one of these smaller banks. However, mortgage banks are protected from hostile takeovers for five years after demutualisation. Alliance & Leicester's protection lasts until April, but hat doesn't rule out friendly takeovers or mergers in the meantime.

UK banks will add to the current excitement by reporting half-year results at the end of July. Analysts will take particular note of the amount of bad debt each institution is exposed to with the global economic slowdown beginning to test borrowers' ability to repay loans. Framlington's Peirson remains upbeat. He said: 'The sector is still fundamentally cheap and the outlook is fine.'

But after a run to 315p, Peirson believes Bradford & Bingley's price has gone far enough. He also doubts the willingness of Abbey to gatecrash the Halifax-BoS merger because of the cash premium it would need to pay. On that basis he believes the 3.1m Halifax shareholders should hang on for the formation of HBOS. He added: 'Cost savings should mean the new company will outperform as we saw after the Royal Bank of Scotland-Natwest takeover.'

Investment bank Fox-Pitt, Kelton, a specialist in the finance sector, is more sceptical about Halifax shares, judging them to be overvalued by 128%. That indicates a fair value of around 610p rather than Halifax's current price of around 785p.

Barclays Stockbrokers advises clients to buy Alliance & Leicester shares, hold Abbey National and sell Bradford & Bingley.

CSFB last Friday advised its customers to buy Abbey, and the week before Deutsche Bank tipped Abbey as its favourite safe play in the sector. BNP Paribas, on the other hand, predicted the bank will underperform the market.

The most recent views on Halifax were put out on 15 June when the stock was around 795p. SG Securities said buy, Teather & Greenwood said hold and Credit Lyonnais said sell.

The banks are due to report their half-year results on the following dates: A&L on 20 July, Abbey National on 25 July, Lloyds TSB on 27 July, Halifax on 31 July, Barclays on 2 August, HSBC on 6 August, RBS on 7 August.