Lloyds TSB is in advanced merger talks with troubled mortgage giant HBOS to create a UK retail banking giant, it was reported today.
The dramatic news came on another day of turmoil in the world’s money markets.
The proposed deal would end uncertainty about the strength of HBOS following a disastrous run on its shares over the past few days.
Both HBOS - parent of Wolverhampton-based Birmingham Midshires - and Lloyds declined to comment.
As turmoil continued in the financial world, by mid-morning the FTSE 100 Index was showing a rise of 77 points after closing down 178.6 at 5025.6 last night.
And the Financial Services Authority warned of ’severe implications’ for consumers as the situation worsened.
HBOS is the UK’s biggest mortgage lender and savings bank. It already has £258 billion of retail deposits, and around 15 million savers.
Lloyds TSB, which does the bulk of its mortgage lending under its Cheltenham & Gloucester brand, is the UK’s third biggest lender in terms of outstanding home loans.
During 2007, the latest year for which figures are available, it wrote eight per cent of all mortgages in the UK. The merger news fuelled a rollercoaster session today for London’s leading share index, which opened up, then quickly slumped to a 40 month-low before recovering back into the black.
HBOS topped the fallers board at the start of trading, then led the casualty list as its share price plunged.
The group sought yesterday to reassure investors over its funding but it failed to prevent its shares slumping for the third day in a row. The bank’s stock fell almost 40 per cent at one point yesterday before closing 22 per cent lower.
Analysts have said HBOS needs to refinance more than £100 billion of funding during the coming months, which could be more challenging after the blow to confidence from the demise of Lehman Brothers. There were suspicions today that HBOS might have been a victim of “short-selling”, where investors make money by effectively betting on the price of a company falling.
The Financial Services Authority issued a statement about HBOS today as its share price fell.
It said: “Since the beginning of the current extreme difficulties in the financial markets, the Financial Services Authority has worked intensively with all major UK banks to ensure they have credible capital and liquidity plans.
“We are satisfied that HBOS is a well-capitalised bank that continues to fund its business in a satisfactory way.”
HBOS was later back at the top of the Footsie risers board, with a gain of 12 per cent. Lloyds TSB was nearly two per cent up.
A spokeswoman for Lloyds TSB also declined to comment on the reported talks with HBOS.
“We would never comment on market speculation,” she said.
Lloyds TSB wrote 24 per cent of all new mortgages during the three months to the end of June.
It is also the UK’s third biggest savings bank with £65 billion saved through it and Cheltenham & Gloucester, and the country’s biggest current account provider.
Elsewhere, in a bid to shore up fragile financial markets, the US government has pledged to provide a £47.2 billion emergency loan to rescue the huge insurer AIG.
The Federal Reserve said today that AIG’s failure could also “lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance”.
A White House spokesman said that President Bush supported the deal.
“These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy,” the spokesman said.
Treasury secretary Henry Paulson said the administration was working closely with the Fed, the Securities and Exchange Commission and other government regulators to “enhance the stability and orderliness of our financial markets and minimise the disruption to our economy”.
Yesterday, shares in the insurance company swung violently as rumours of potential deals involving the government or private parties emerged and were dashed. By the end of the day its shares had closed down 20 per cent and slid another 45 per cent after hours.
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