BREAKINGVIEWS-Lloyds' defence against surgery doesn't convince

-- The author is a Reuters Breakingviews columnist. The opinions -- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By George Hay

LONDON, Jan 27 (Reuters Breakingviews) - Lloyds Banking Group (LLOY.L) has failed to find a magic bullet that could kill off the threat of radical surgery. The UK lender, whose acquisition of rival HBOS pushed its share of the current account market to 30 percent, has made a fulsome submission to the Independent Commission on Banking, arguing why this dominant position doesn't matter. But it isn't convincing.

The bank relies heavily on an analysis by consultants Oliver Wyman. This says the UK sector looks competitive considering market concentrations elsewhere. The UK has more players in its banking market than Australia, Canada, Germany, France, the United States and Sweden, and than in supermarkets or utilities.

But that's not the whole picture. Current accounts, a key area of retail banking, are not working well according to an Office of Fair Trading study in 2008. As with lending to small businesses, these are less competitive foundations for flogging more lucrative savings products. Lloyds disagrees, but is hardly an impartial observer.

What counts is not concentration, but how easy it is for new entrants to come in, and whether a weak bank can be pushed out of the market. In the UK, and elsewhere, big banks do not have the same competitive pressure as other industries because they know governments will not let them fail. Lloyds trumpets the rise of Metro Bank and Virgin Money, but as the latter's submission makes clear, building up the relationships and brand loyalty needed for small business and current accounts, meeting new Basel III capital rules, and making a decent return, is very hard.

To improve, the UK market needs three reforms. All banks need reliable resolution and recovery schemes that mean they can fail -- without them, they do not have the full discipline of the market. Then, banks need to make it far easier to switch lenders. To be fair, Lloyds supports these first two moves.

But the other key factor is new entrants. Lloyds' market share will fall to 25 percent when it makes branch disposals as penance for its state aid, but that's only a third of the 14-percentage-point uplift from buying HBOS. Lloyds gained this only in highly unusual circumstances: the government waived the need to refer the deal to the Competition Commission. If Lloyds had to sell all its acquired market share, that could create three new entrants. New chief executive Antonio Horta-Osorio has a fight on his hands.

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CONTEXT NEWS

-- The UK's Independent Commission on Banking published submissions from interested parties on Jan.26, including all the major UK banks.

-- Lloyds Banking Group's submission said that the UK retail banking sector was not concentrated in terms of volume of market players compared to international comparators and other relevant UK markets.

-- The bank stated that competition and contestability were more important than the number of players in the market. But it added that barriers to entry were low in savings, mortgages, personal loans and credit cards, and "moderate but falling" in current accounts.

-- The bank said further action should concentrate on easier and faster services to switch between current account providers and greater transparency on all savings products. Lloyds also said it found no evidence that its merger with HBOS in October 2008 had harmed competition.

-- A report published in November 2010 by the UK's Office of Fair Trading found that new entrants face significant barriers to entry in UK retail banking market, particularly in the current accounts sector and in lending to small businesses.

-- The report followed another study by the OFT in July 2008. This found that current accounts were a "gateway" to other products, but were not working well for consumers.

-- Lloyds' submission to the ICB: link.reuters.com/rab77r

-- Virgin Money's submission to the ICB: link.reuters.com/sab77r

-- Reuters story: Ex-RBS CEO says UK should consider bank break-ups [ID:nLDE70P1T8]

-- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Chris Hughes and David Evans)

((george.hay@thomsonreuters.com)) Keywords: BREAKINGVIEWS LLOYDS/

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