XG3/8019
COMMERCIAL IN CONFIDENCE
PRIVATE AND CONFIDENTIAL
6. 5.92
PAPER FOR OFT
THE LLOYDS BANK PLC BID FOR MIDLAND BANK PLC
1 The Bank considers there are two main issues relevant to the
the first concerns the prudential aspects, the second the
bid;
competitive aspects.
Prudential Aspects
2 The Bank has no prudential concerns about the proposed merger of the two banks, although we would have to discuss in some detail the means by which the merger was achieved, and the management problems associated with that process. The bid offers the prospect of strengthening the position of Midland by absorbing it into what is currently the most profitable of the main UK banks.
Competition Aspects
3
Traditional measures of excess capacity do not easily apply to the banking industry because there is no definition of output. Overcapacity can however manifest itself in two ways: first in banks not maintaining an adequate rate of return to cover capital. The big four banks have managed to average a return on equity of only 9.7% since 1986 (less than the average rate of interest over the same period) compared to 20.8% in the five years before 1986. Second a very high cost base. Despite recent cost reduction programmes, which have reduced the number of branches by over 1,000 in three years and staff by 22,000 over the same period, the Big Four spend just over two thirds of their gross income on employees, property, computers and other non-interest
COMMERCIAL-IN-CONFIDENCE