Banking update: RBS and Lloyds parts to be sold off to the cheapest bidder too?

Tonight the BBC are reporting that a major announcement will be made by the UK Government tomorrow, November 3, regarding the future of the Lloyds and RBS banks that it owns major stakes in following the bailouts of last year. It seems likely that tomorrow's proposal for Lloyds and RBS will be similar to the proposal for Northern Rock featured on this blog last week. At present speculation suggests that both banks will have to split off parts of their branch network to form new 'good banks' (without toxic assets) for sale within four years, while the taxpayer keeps all the bad bits. As with the Northern Rock, the good part of which seems likely to be sold off before the 2010 election, surely the worry must be that four years will not be sufficient for the taxpayer to gain a return on the banks as they return to profitability. However, the hope must be in the Lloyds case that this will undo last year's shotgun marriage between Lloyds TSB and HBOS, one of the largest mergers in UK corporate history, and which the Office of Fair Trading recommended against due to the combined market share of the two banks combined. Whatever happens is bound to be very interesting indeed - it will be interesting to see where this will leave the remains of Scotland's banking industry.

Northern Rock split a poor policy decision for the future

Today the EU approved the UK government plan to split nationalised bank Northern Rock into two. One half will become a so called 'good bank', to be flogged off to a private company while the other half will become a 'bad bank' and remain in the state sector. The bad bank will keep all of the Rock's 'toxic assets', such as the 100% plus mortgages which the bank was left holding after the US financial sector suddenly lost interest in 'repacking' them as AAA securities (which weren't) in 2007.

The government apparently intends to return the 'good bank' to the private sector by the 2010 General Election. Given that that will be in May or before, the privatisation will happen almost straight away in business terms - a very quick privatisation. Although no doubt there will be a competitive process to buy the good bank, bidders, who could include Tesco Bank, Virgin Money, or the National Australia Bank, will be buying a business which would almost need rebuilding from scratch as a credible savings and mortgage bank. Meanwhile taxpayers will be left holding the toxic assets in the bad bank, and could possibly be paying for them as generations. Surely it would be wiser to rebuild Northern Rock in the public sector, but with private sector style management for a ten or twenty year period to restore it to profit, before releasing it back on the market for a much larger sum? Its not as if there are not precedents. Even the privatisation hungry Conservative government of the 1980s knew this; British Steel was a basket case nationalised industry suffering serious losses when the Conservatives came to power in 1979. By 1988 it had been turned around by new management who closed unprofitable plans, improved the company's marketing strategy and made it a world productivity leader in the industry. In the car industry the basket case British Leyland, nationalised by Labour in 1975, was also returned to the market successfully by Mrs Thatcher's government in 1986, again with unprofitable parts of the company closed and the company's trade union problems resolved. If we must have government intervention in industry, why can't we turn it around and make it a good investment for the taxpayer?

Tesco - making a lot from little things

Today the UK retail multinational Tesco announced half year results which exceeded the expectations of the City. The company's Chief Executive, Sir Terry Leahy proclaimed that the British economy was over the worst of the recession, perhaps missing the point that people are likely to turn to a low cost retailer such as Tesco during a recession. Tesco made a profit of £1.41bn on a turnover of £30.4bn; sales in the UK grew by 2.8%. The company has also created 6,500 jobs this year so far. The company has also successfully expanded globally from its UK base, firstly in emerging economies in central and eastern Europe, then in Asian countries; attempts to enter more developed economies such as the US have as yet been less successful.

Tesco's present record may be very impressive, but it is easy to forget that in the 1970s the company was the sick man of the British high street. Tesco's founder Sir Jack Cohen had expanded the company from its origins as a market stall in 1919 (all good retail stories start with a market stall) into a bulk-buying chain of grocers, and then after post-war rationing was abolished in 1954 into supermarkets. At this point supermarkets were new and exciting to consumers; Cohen became famous for a 'pile it high, sell it cheap' philosophy, expanding the company rapidly via new store openings and frequent acquisitions. The low margins on basic goods could easily be recouped by selling them on a mass scale; a chain of 900 stores, all in the UK was established. By the late 1970s however the company was struggling; more sophisticated retailers such as Sainsbury's and Marks and Spencer were attracting increasingly affluent consumers who had begun to shop on quality rather than price. Tesco found that many of its stores, inherited from a mixed bag of owners, were too small and poorly designed, while the company was not even using its market power fully to institute central buying with the benefits in pushing supplier prices down.

The company bounced back under Managing Director Ian MacLaurin, whose initiative 'Operation Checkout' in 1977 saw Tesco institute central purchasing and introduce new price cuts, forcing Sainsburys to cut its prices in retaliation. This was followed by an aggressive modernisation campaign to reduce the company's downmarket image, with 500 stores being closed and others expanded, with lighting improved and isles widened. Own brand products were also introduced for the first time, gradually being adjusted into a range of their own to appeal to customers of all income levels. By the mid-1990s Tesco had become the UK's largest supermarket chain, successfully expanding into Scotland and Northern Ireland ahead of rivals Sainsbury's. Now the company is aiming to purchase one of the UK's nationalised banks, perhaps Northern Rock or the Royal Bank of Scotland (a once unthinkable possibility - Tesco Personal Finance was originally a joint venture with RBS), to add to its rapidly growing banking arm. As Tesco diversifies further, both geographically and in range of products offered, in order to satisfy stock market expectations of growth, will it again reach a stage where it over-expands based around a narrow business model and becomes unmanageable?