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Report of Lloyds hostile RBS bid rejected

LONDON: Britain's biggest retail bank Lloyds TSB Group Plc was reported on Sunday to be planning a hostile takeover bid for Royal Bank of Scotland which would disrupt the current takeover bid battle for National Westminster Bank Plc.

But sources close to the banks told Reuters on Sunday it was extremely unlikely Lloyds TSB would launch such a bid because Lloyds TSB preferred friendly deals and would have to dismember its key TSB Scotland operations to clear competition authorities.

"This has no credibility whatsoever and it is an attempt to confuse," an investment banking adviser to Royal Bank of Scotland told Reuters, adding he was confident NatWest shareholders would make their judgments on the merits of the bid, rather than anything else.

"This is absolutely rubbish. It's not true," a banking source close to Lloyds TSB told Reuters, adding that the bank did not want to be used to disrupt the NatWest bid process.

Earlier The Sunday Times reported that Lloyds TSB Chairman Brian Pitman and Chief Executive Peter Ellwood were studying plans on Saturday and Sunday for a hostile takeover bid for Royal Bank this week, the last week before the Monday, February 14 deadline in the NatWest bid battle.

The report cited a banker close to the situation as saying no final decision had been taken, but that Royal Bank was Lloyds' main target.

"The Royal Bank interest is opportunistic in part, but it is also a bank that Lloyds has been looking at for the last 20 years," the banker was quoted as saying in the Sunday Times.

Lloyds and its investment bank advisers were plotting to swoop this week because they thought Royal Bank was vulnerable in the wake of a fall in its share price since bidding for NatWest in late November, the Sunday Times said.

A Lloyds bid for Royal Bank would be a bombshell at a crucial moment in the bidding process for NatWest. Big institutional investors are expected to decide early next week whom to support. Most have said they will support one of the Scottish banks, but have yet to decide which one will win. A suggestion of a takeover of Royal Bank would throw those considerations into disarray.

The Sunday Business newspaper reported that Lloyds was considering a bid for either Royal Bank of Scotland or its rival in the battle for NatWest, Bank of Scotland, but did not specify which was Lloyds' favourite. But the Sunday Business noted that Lloyds would face significant regulatory hurdles.

TSB BIG IN SCOTLAND

Lloyds has had a significant presence in Scotland since its 1995 merger with the TSB group, which has over 180 branches in Scotland employing over 4,000 people.

Analysts and bankers said Lloyds TSB would have to sell a large part of its TSB operations in Scotland to clear any bid for Royal Bank with competition authorities. They also said Lloyds, which is still cementing its agreed merger with life and pensions mutual Scottish Widows, has a history of agreed rather than hostile deals.

TSB is seen as Scotland's third biggest retail bank behind Royal Bank and Bank of Scotland, with strong operations in Aberdeen and Glasgow. In corporate banking, TSB is seen number four behind the two Scottish banks and National Australia Bank's Clydesdale Bank.

Royal Bank is however seen as a more likely partner for Lloyds than Bank of Scotland because it has more "fat" in cost terms to cut out. Its Direct Line insurance unit, its Angel Trains leasing unit and its Citizens banking operation in the Northeast of the United States could also be sold as non-core assets to help fund the bid.

Robert Fleming banking analyst Hugh Pye said Royal Bank's core UK banking and credit card operations had a cost to income ratio of 55.2 percent, which compared with Bank of Scotland's more efficient 47.0 percent.

"If you were Lloyds and thinking of going for any one of the two then it would be Royal Bank, because it's less efficient as a bank and it's more of a breakup story," Pye said.

Bank of Scotland also pointed out it was more efficient than Royal Bank and its cost to income ratio was second only to Lloyds.

"It's difficult to see what Lloyds TSB would get from taking over Bank of Scotland," a Bank of Scotland spokesman told Reuters.

Royal Bank of Scotland Group Chief Executive George Mathewson told Reuters through a spokesman that a combined RBS-NatWest operation would be seen as capable of mounting a major challenge to Lloyds TSB. "Every business needs a good competitor and Lloyds would view RBSNatWest in that light," Mathewson said.

Meanwhile, NatWest itself rejected newspaper comments that it was about to throw in the towel and recommend one of the two hostile bids. NatWest has previously rejected the two bids as risky and inadequate.

"Contrary to the report, NatWest has not made soundings informal or otherwise to either Bank of Scotland or Royal Bank of Scotland," a NatWest spokeswoman told Reuters.

NatWest was still meeting with institutional investors, who had yet to make their decisions, she said.

"NatWest is halfway through its presentations to shareholders and the response of those we have seen has been good as NatWest has a strong case to make with its own low risk and high value standalone story," she said.-Reuters