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Banking's blushing bride ready for a marriage of equals.

Byline: Jane Merriman and Clelia Oziel Special Correspondents

Bank of Scotland's latest engagement could mean celebrations all round.

If the Scottish bank clinches a merger with the UK's biggest mortgage bank, Halifax, it will end its long and painful search for a bride. The deal could also help Lloyds TSB to win the hand of its target Abbey National.

The Scottish bank has been unlucky twice in efforts to find a partner to bolster its position in the fast-consolidating financial services market. Last year, it lost the fight for National Westminster Bank to rival Royal Bank of Scotland and, in February this year, was jilted by Abbey National.

The courtship between Bank of Scotland and Halifax, which would create the UK's fifth largest bank by market value, could entice rival bidders into the arena, with Barclays and National Australia Bank both long touted as potential suitors for the Edinburgh bank.

But industry commentators said the merger made strategic sense for both parties and offered potential synergies of around pounds 300 million annually.

Combining Halifax's retail banking franchise with the Scottish bank's corporate and small business operations could forge a diversified group able to challenge the UK's main four banks - Barclays, HSBC, Lloyds TSB and Royal Bank of Scotland.

The emergence of a so-called fifth force to compete with the big four, particularly in small business banking, could also make it more likely that Lloyds TSB could get a green light from competition regulators to proceed with its pounds 19 billion unsolicited bid for Abbey National.

'At the margin, it potentially makes Lloyds/Abbey slightly more likely, given that Halifax/Bank of Scotland will be a realistic fifth force,' said Goldman Sachs banking analyst David Townshend.

The Competition Commission is investigating whether Lloyds' takeover of Abbey would be against the public interest.

A source close to the Lloyds/Abbey situation said: 'It changes the dynamics of the inquiry completely because the commission has been thinking: 'If we say no on this one, the Abbey will always be able to go and do the Bank of Scotland deal and it will create something better'. The dynamic of that goes away.'

Abbey ended merger talks with Bank of Scotland in February.

The commission is also investigating the UK banks' dominance of small business banking, where they stand accused of overcharging customers and making it tough for new competitors to enter the market.

'The Government is looking for a major competitor in small business banking,' said James Johnson, analyst at Credit Lyonnais Securities. 'If Halifax/Bank of Scotland becomes the new structural competitor, that achieves their objectives.'

Having 'shown a leg' to a whole range of banking partners, Bank of Scotland may have decided to settle down with Halifax via a nil-premium merger, while Halifax, aloof until now, appears to have abandoned its long-held belief in staying single.

'Why does Halifax see the need to do a deal with anybody because at the time of their results, they told us they had enough capital and management to sustain an independent future?' said Donald Tosh, of Morley Fund Management.

'Secondly, Bank of Scotland seems to have talked to everybody - Abbey, Halifax, Barclays, NatWest, Legal & General to name but a few. This leaves me wondering what is the problem with Bank of Scotland.'

The deal is not yet sewn up, with touchy issues such as who gets the top jobs and the head office location still unknown. The two have also given no indication of possible cost and revenue benefits.

Strategic fit and scale are seen more important than cost savings. 'There's not lots of hanging fruit,' said one banking source. 'But there's bound to be some efficiency savings and the greater scale gives them the opportunity to take bigger bets as a business.'

The deal could put Abbey National in a difficult position. It could face being taken over by Lloyds TSB if regulators allow Lloyds to make a bid, or if Lloyds is blocked, being left on the shelf.

There were some suggestions that Abbey could now consider making a bid for Bank of Scotland.

'There an issue now for Abbey as to strategy,' said one banking analyst.

'They could risk being seen as an also-ran to Halifax/Bank of Scotland. They would be ill-advised to bid for Bank of Scotland, but that would not stop them bidding.'
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Publication:The Birmingham Post (England)
Geographic Code:1USA
Date:Apr 26, 2001
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