Lloyds will find Euro deal tough to sell

LONDON,(Reuters):

LLOYDS TSB, now expected to be thwarted in its attempt to buy Abbey National, is likely to redouble its efforts to forge a partnership in Europe as its merger possibilities at home virtually disappear.

But Lloyds isn't the only bank looking for a partner in Europe, and cross-border mergers have not suddenly become easy to explain to shareholders sceptical of their value-enhancing capabilities.

"Everybody is talking to everybody in Europe," said Hugh Pye, a banking analyst at BNP Paribas. "When somebody makes the first (cross-border) move, others will follow, but it's still difficult to see how value will be created for shareholders."

Lloyds bid 19 billion pounds (US$26.7 billion) for Abbey National in a deal, which would have stretched competition criteria but which most analysts agreed was not a great threat to consumer choice in either the current account or small business markets.

But, based on recent comments by unidentified sources to British newspapers, it seems the U.K. government will decide that it cannot countenance fewer banks in Britain or that if it can, the conditions it will impose will make it impossible for Lloyds to go through with its hostile approach.

Lloyds, once the darling of European banks with its dynamic take-over policy and massive returns, has said for some time that Europe is where its future lies. In the past couple of years, however, it has found cementing a deal impossible.

With pressure on its margin and market scepticism about where the growth will come from, Lloyds has seen its share price drop from well over nine pounds in mid-1999 to its current level of 663 pence.

Chief Executive Peter Ellwood says he will not be rushed into a European deal, because Lloyds can still get a lot of growth out of its domestic business. But he has also said that the bank's longer-term future lies in European expansion. There aren't that many candidates who fit the bill.

So far, the most often touted partners have been the Benelux institutions Fortis, ING and ABN AMRO.

"Netherlands banks have been on the Lloyds radar because many of the cultural barriers present in deals with other European countries don't exist with the Dutch," said one analyst who declined to be named.

Good jump-off point

Even though the Dutch market is relatively small, it could be a good jumping-off point for the rest of Europe and, as analysts point out, any assault on Europe may involve more than one deal.

They also say that acquiring operations in wealth management and insurance and pensions is likely to be the goal, rather than adding operations in purely retail markets, which are often very competitive and not very profitable.

BNP Paribas's Pye said deals may not come in the form of total mergers but could involve merging certain parts, noting, for example, the talks between three German banks about merging their mortgage operations.

One analyst, who spoke on condition of anonymity, said Lloyds TSB could look at a merger with Deutsche Bank's retail arm DB24.

This would have the advantage of allowing Lloyds to avoid having to cope with Deutsche's investment banking arm. Lloyds has a well-known aversion to the volatility of investment banking earnings.

Germany's Commerzbank has also been mentioned as a possibility as it would bring a big European on-line presence and a sizeable wealth management business.

Elsewhere, Spain's second-biggest bank by assets BBVA has also been mentioned as a possible partner, and Spain could be a place where Lloyds would show the market it means business in Europe.

BNP's Pye said Lloyds looks weak when it comes to contacts in Europe.

"They do look weak in that sense, so they could show the market that they mean business in Europe by entering some business relationships and perhaps taking a token cross share holding."

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