Abbey needs to be snatched up soon, before it deteriorates further, and Spain’s SCH has the right track record.

Spain’s SCH, an outstanding bank whose profitability is as good as or better than its European competitors, is looking to wrap up the acquisition of UK bank Abbey by Christmas. With a 2003 return on assets of 1.17% and profits on average capital of 25.8%, SCH’s agreed £8.35bn paper bid, announced in July, is an innovative take on cross-border European deals, where the potential cost savings cannot compare with those possible in all domestic deals. The Spanish bank is promising savings of €450m, mainly through its superior technology, and says there may be about 3000 redundancies. It has already proved its technology strategy can work through some of its Latin American acquisitions, the caveat being that every deal is unique. In Abbey’s case, it says that 11 different technology platforms can be reduced to one and 450 applications can be reduced to fewer than 200. What it can also do is revitalise the retail operations. Current management has sold off the wholesale operations and provided reassurances that no more capital needs to be injected into its insurance operation. The future upturn in Abbey’s fortunes rests solely on its underperforming retail segment. SCH has a proven track record in this segment. The surprising bias against its bid in the UK national press, for instance, with stories implying that it plans to impose its Spanish client-charging structure, ignores the potential gains. SCH has managed to invigorate retail banking in 35 countries where it has operations, paying attention to each market’s unique characteristics. As The Banker went to press, HBOS, the UK’s fifth largest bank, looked likely to make a bid – which some argue could be as much a spoiling tactic to bring in other bidders as a serious attempt to buy the bank. SCH is certainly taking advantage of Abbey’s low share price and the UK banks can be rightly concerned about a formidable competitor getting into the market too cheaply. But the end result could be that Abbey gets left on the shelf for an unacceptably long time and deteriorates further. An HBOS bid or one from another UK bank would surely be sent to the Competition Commission. After all, a combined HBOS/Abbey would have about 34% of the UK mortgage market and almost 25% of the savings market. The referral process could take up to eight months – eight months in which value is likely to be destroyed at Abbey through plummeting staff morale, customer wariness and departures, and the loss of management focus and time. The juiciness and uniqueness of the target, allied to the credibility it has at stake, means that SCH is unlikely to withdraw and other banks, such as Citigroup or another European bank flush with cash, might be tempted. The net profits of European banks at about €64bn were equal to the GDP of Hungary last year and look like rising to €89bn in 2005, estimates Merrill Lynch. With that much excess capital around, Abbey is bound to end up in someone’s arms. But for now, its best offer lies with SCH.

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