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Banks, Financial

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Categorized | Financial

Lloyds in pole position to buy BofA’s UK credit card business

Posted on November 20, 2016

Lloyds Banking Group has emerged as the leading bidder for Bank of America’s £7bn credit card business in Britain, taking the UK lender closer to its first acquisition since being rescued by the taxpayer more than seven years ago.

Two people briefed on the process said Lloyds had moved ahead of Cerberus, the US private equity group, in the bidding for MBNA’s British credit card operation after BofA backed down on a crucial sticking point in negotiations.

Lloyds had initially pulled back from the auction because of BofA’s refusal to share the future costs of compensating customers for mis-selling payment protection insurance. But BofA has now agreed to indemnify the buyer if PPI costs rise above a fixed cap. 

Lloyds has been prevented from making acquisitions since its takeover of failing rival HBOS during the financial crisis, a deal that left it on the brink of collapse and needing a taxpayer bailout in 2009.

However, the bank has since returned to profit after heavy restructuring and the government has sold more than three-quarters of its stake, which is now below 10 per cent. The Treasury aims to exit fully by next year via a trading plan to drip-feed its shares into the market.

MBNA fits with Lloyds’ search for acquisitions to expand in higher-margin areas, including unsecured consumer loans, car finance, leasing and fleet management as it tries to offset the impact of low interest rates on its main mortgage business.

Cerberus was told several weeks ago that there was “a more attractive offer” and its team now believes it has lost the auction, said one of the people, adding that it had “downed pens”. Another said Cerberus had faced difficulties with a “complex” financing package and Lloyds could seal a deal in the first quarter of 2017. 

The board of Lloyds is reluctant to add to its exposure to the PPI scandal, which has cost the bank £17bn. It set aside another £1bn last month, while saying that was expected to be its last PPI provision.

MBNA has allocated about £1.6bn for PPI compensation, but it is widely expected to take another charge this year. The Financial Conduct Authority is next month expected to finalise plans for a PPI compensation claims deadline of mid-2019 — giving Lloyds comfort that its exposure is capped. 

There is no certainty that the deal would be completed, the people said. One pointed out that if Lloyds bought MBNA it would control about a quarter of the UK credit card market by receivables, close to the share of market leader Barclaycard, which may raise competition issues.

A sale to Lloyds could be bad news for the town of Chester, where the MBNA business is based. The UK bank is likely to transfer MBNA’s customers to its own systems and lay off many of its 1,700 staff, mostly based in the town, one person said.

Analysts have warned that buying MBNA would eat into Lloyds’ ability to pay higher dividends, particularly as a potential economic downturn because of Brexit is likely to eat into the bank’s profitability. 

Lloyds is expected to access the Bank of England’s “term funding scheme” — a new programme to provide £100bn of cheap funds for banks to lend to small businesses and households — to lower the borrowing costs of MBNA, analysts have predicted. 

Five years ago, BofA abandoned plans to sell its entire European credit card business, offloading some operations in Ireland and Spain, while keeping the main UK business after bids fell below its target valuation.

MBNA made a profit of £166m last year and has 5m credit card customers, giving it about 11 per cent of the UK market by credit card balances. Lloyds has a £10bn credit card loan book and about 15 per cent market share. MBNA is expected to fetch a premium to its £7bn of outstanding credit balances.

BofA, Lloyds, and Cerberus declined to comment.