James Crosby, chief executive of HBOS Plc, said he decided not to bid for Abbey National Plc, HBOS's largest mortgage-banking rival, because "cold analysis in the head" told him not to. He ruled out acquiring smaller UK banks for the same reason.

The decision leaves HBOS, the UK's largest mortgage lender, with no potential acquisitions of its own even as it allows Santander Central Hispano SA, Spain's biggest bank, to acquire Abbey and expand its UK foothold.

In walking away from Abbey, Crosby sacrificed gaining 18 million new customers, the equivalent of about 10 years of growth at HBOS's current rate.

"HBOS is going to find life tough and it's going to find life even tougher with Abbey owned by Santander, which is a jolly well-run bank," said Jim Wood-Smith, head of equity strategy at Gerrard Ltd in London, which oversees about 12 billion pounds (US$21.5 billion). "Abbey was the only deal in town and it's been priced out of their range."

Santander on Wednesday said it plans to cut costs at Abbey by an annual 450 million euros (US$547 million) by installing new computer systems and eliminating about 3,000 jobs. Abbey's cost-to-income ratio, a standard measure of efficiency, was 52.7 per cent at its consumer bank last year, while HBOS's consumer bank spent 47.8 pence of every pound in income.

Santander, which boosted its share of the Spanish mortgage market to 8.6 per cent from 6.6 per cent over three years, plans to sell more mortgages, personal loans and savings accounts through Abbey branches. The additional sales will generate an extra 220 million euros (US$264 million) in pretax profit a year, Santander General Manager Juan Rodriguez Inciarte said at a presentation in London.

Marketing products

Edinburgh-based HBOS will forgo gaining control of a third of Britain's US$1.37 trillion mortgage market, which it would have secured by buying Abbey. Instead, the bank must now convince investors that it can earn more money from its existing businesses selling mortgages, bank accounts, insurance and credit cards.

"One of the key questions will be how well can they do that in light of a stronger competitor which will likely be formed after the Santander-Abbey takeover," said David Ridland, who helps oversee about 14 billion pounds (US$25.2 billion), including HBOS shares at Britannic Asset Management in Glasgow, Scotland.

"One can expect Santander to be quite aggressive in terms of marketing of products."

The mortgage business is likely to grow more difficult as interest margins narrow, said Gerrard's Wood-Smith.

Britain's central bank has raised its benchmark lending rate five times since November to 4.75 per cent to slow a boom in property values that has doubled house prices in five years.

Money loser

There is a "significant probability" that residential housing prices may fall, Stephen Nickell, a Bank of England policy maker, said on Tuesday. House prices fell 0.6 per cent from July, the first drop since August 2002, leaving the price of an average home at 160,565 pounds (US$289,017), HBOS said this month.

Still, Crosby's decision not to bid shields HBOS shareholders from the costs and risks of acquiring a bank that has lost 1.86 billion pounds (US$3.35 billion) in two years, and from a potential bidding war with Santander, which has agreed to buy Abbey for 8.7 billion pounds (US$15.66 billion).

Crosby also has averted a potential probe by the UK's antitrust regulator, which three years ago blocked a takeover of Abbey by Lloyds TSB Group Plc.

"We had a strong case to make to the Competition Commission, but the risk was that we might not get approval," Crosby said. HBOS has about 22 per cent of the UK mortgage lending market. Abbey has about 11 per cent.

'Cold analysis'

Cutting costs at Abbey would have required HBOS to shut branches and fire thousands of workers.

"The heart says we should be going for this but the cold analysis in the head says no," Crosby said on Wednesday. As for other acquisitions: "We're not looking. The smaller players would be almost as much effort to integrate for far less reward."

Investors welcomed his decision by sending HBOS shares up 3.3 per cent to 738 pence on Wednesday in London, valuing the bank at 28.7 billion pounds (US$51.66 billion). The stock has fallen 14 per cent since September 10, 2001, the day Crosby completed Halifax Plc's 9.8 billion-pound (US$17.64 billion) takeover of Bank of Scotland.

"It shows a lot of confidence in HBOS's earnings going forward that Crosby feels he doesn't have to do a deal," said Bruce Packard, UK banking analyst at ING Financial Markets in London.

"Their results have been fantastic and the share price doesn't reflect that."

Overdraft charge

Crosby boosted net income at Edinburgh-based HBOS by 28 per cent last year and 31 per cent in 2002, a faster rate of growth over the two-year period than its three bigger UK rivals: HSBC Holdings Plc, Royal Bank of Scotland Group Plc and Barclays Plc. Net income increased to 1.4 billion pounds (US$2.52 billion) in the first half of 2004, from 996 million pounds (US$1.79 billion) in the first half of 2002.

Yet Crosby hasn't widened profit margins.

The bank's net interest margin, a key measure of lending profitability, narrowed to 1.77 per cent in 2003, from 1.83 per cent in 2002, partly because of Crosby's strategy of attracting customers with cheaper loans and higher interest on savings.

(China Daily 09/20/2004 page11)