Halifax & Bank of Scotland Essay

The UK has one of the most diverse and dynamic banking sectors in the world. Banking is now a highly competitive industry. Financial consumers are now more sophisticated as they are now more aware of available banking options. The assets of the UK banking system were i 3,441bn (August 2001), which were dominated by a dozen or so retail banks, with national networks, mostly serving domestic, personal and corporate customers. Currently, the big four banks – HSBC, the Royal Bank of Scotland, Lloyds TSB and Barclays, dominate retail and business banking, jointly accounting for 68% of all UK current accounts. Both Halifax, founded in 1853, and 306-year-old Bank of Scotland are seen as business icons in their regions. Halifax is based in England, while the Bank of Scotland has very few branches south of the border. A merger between these firms would increase the geographic scope for potential customers. Halifax started as a building society and is now more widely known as a big mortgage lender. In the wider community, the Halifax Bank has a very active community-banking sector catering for charity and non-profit organizations including housing associations, credit unions and community development operations. In comparison, the Bank of Scotland’s strength lies in the corporate market. It would seem very likely that both firms would like to achieve higher profitability and growth opportunity through cross-selling products to each other’s customers. For example, the products developed by Halifax could be marketed effectively to Bank of Scotland’s customers and vice versa. Because both banks operate complementary activities, it is possible the combining of both firms will result in synergies, which may also result in increased efficiency. There may also be opportunities to achieve savings through cutting some unnecessary costs. For example, the amount of staff needed for the combined firm is likely to be reduced. By merging together, the size of the combined firm will certainly increase, thus leveraging the combined spend to negotiate better deals. The market position of the combined firm will be strengthened. Its market share within the industry will increase, maybe even enough to compete with the big-four banks, thus increasing the competition within the banking industry. In reality, there are wide ranges of techniques that can help analyse a firm’s performance – some firms may base their performance on sales, whereas others through the quality of products. Economists usually analyse a firm’s performance based on the amount of profit it is making. For a thorough analysis, this paper will be looking at the firm’s: market value, profitability, stability, value for shareholders, efficiency, and capital adequacy. It must be noted that firms within the banking sector are subject to many economic uncertainties, which can influence how well a firm is doing from year to year. In this case, these uncertainties include: interest rates, employment rates, as well as the condition of the equity markets. For example, the base rate in January 2000 was 5.75%, however, at January 2002, the base rate was at 4. 00%5. To analyse the performance of the banks before and after the merger, the firms’ financial accounts will be examined and ratios will also be calculated. 6 The main performance indicators that will be analysed include: Profit before tax; Total assets; Dividends and Earnings per share. In addition, the return on equity, cost:income ratio and the firm’s capital strength will be examined. These ratios will give a clear assessment of the firm’s performance compared with that of other firms. Before the merger, in 2000, Halifax and Bank of Scotland had market values of $22,105million and $11,762million respectively. Post-merger, in 2002, HBOS then had a market value in excess of $31billion7. This immediately signifies the success of the merger, as the combined company is worth now worth a lot more in the market. Figure 1 – Profit before tax From an economic point of view, it is important that a firm makes a profit otherwise there would be no point of the existence of the firm. The Profit & Loss account of a firm shows the results of trading over the previous 12 months. It shows the net effect of income less expenses. The reason that profit before tax is analysed rather than profit after tax is due to the fact that interest rates and inflation changes could affect the amount of tax that is paid each year. In 2000, Halifax made i 1,715million profit (before tax), compared with Bank of Scotland, which made i 911million. It would be expected that when both companies have merged together, the pre-tax profit should increase. Figure 1 shows that in 2002, HBOS made a pre-tax profit of i 2,909million, which is more than the separate firms’ pre-tax profit added together. This shows that HBOS are actually performing better than the previously separate firms.