Merger push on ice for battered small lenders

By Clara Ferreira-Marques and Steve Slater

LONDON (Reuters) - Britain's battered smaller banks and other lenders are ripe for merging to create a bigger, stronger bank, but fragile markets and a grim economic outlook are likely to delay consolidation until some stability returns.

Bradford & Bingley BB.L, the UK's largest lender to landlords, is at the sharp end of concerns about smaller banks as it nears a 400 million pound cash call set to be backed by other banks but snubbed by its army of small shareholders as concerns over bad debts deepen.

An acquisition of B&B would solve a headache for regulators and the industry, removing the threat of a repeat of last year's embarrassing collapse of mortgage lender Northern Rock.

Analysts and bankers say rivals Alliance & Leicester ALLL.L and other lenders like Paragon (PARA.L), Bristol & West (BKIR.I), Cattles (CTT.L) and smaller building societies would all benefit from being pulled together. There are also multi billion-pound closed books of mortgages held by top investment banks that could be included.

Potential buyers or consolidators are watching with interest as valuations plummet, bankers and sources familiar with the matter, but they are not confident enough to pounce yet.

"It's very difficult to make deals happen because share prices are just so volatile. You could start negotiations and two days later the share price is 20 percent lower," said James Eden, analyst at Exane BNP Paribas. "And all the banks think they are worth more than the current price."

The logic for bringing together several of the smaller banks or other lenders would be to cut costs, strengthen their capital base to withstand shocks, improve credit ratings, and reduce funding costs at a time of tough wholesale markets.

The most public move so far has come from entrepreneur Clive Cowdery, who wanted to inject 400 million pounds into B&B and use it to spearhead consolidation of smaller lenders.