Bank Break-up is 'Unrealistic'

Analysts agree with Ed Miliband that the U.K. banking market is concentrated, but think that a plan to break up the banks will very likely prove unrealistic

Erin Davis 20 January, 2014 | 2:19PM
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Ed Miliband, leader of the U.K.'s Labour Party, said in a speech on Friday that he thinks that the U.K. retail banking market is too concentrated, and called for the top banks to be required to give up "significant" numbers of branches. This would be on top of the approximately 630 and 320 branches that Lloyds (LLOY) and RBS (RBS), respectively, are already required to divest as a consequence of their bailouts during the financial crisis. Miliband called for fairly swift action, saying that his policies would see the divestitures completed within a five-year parliament.

We think politicians are unlikely to break-up the banks

We agree with Miliband that the U.K. banking market is concentrated, but think that a plan to break up the banks will very likely prove unrealistic. We see the U.K. retail banking market as a rational oligopoly. The top five banks - Lloyds, RBS, HSBC (HSBA), Barclays (BARC), and Santander (BNC) - control about 85% of the market and Lloyds alone controls 30%. We have long thought that these banks compete softly on price, and think that this soft competition is the source of the 20%-plus pre-tax returns on equity that we regularly see from U.K. retail banking.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Banco Santander SA282.85 GBX-1.24Rating
Barclays PLC199.46 GBX0.83Rating
HSBC Holdings PLC432.80 GBX-0.32Rating
Lloyds Banking Group PLC49.28 GBX0.33Rating
NatWest Group PLC233.20 GBX-0.30Rating

About Author

Erin Davis  is a senior banking analyst for Morningstar.