Feverish bid speculation gives banks a boost

Generally speaking, the UK's high-street banks are terrible places to put your money thanks to the pathetic rates of interest they pay on most accounts. But the same cannot be said of holding their shares. Indeed, in recent months Britain's big banks have made their shareholders very happy - Lloyds TSB is up 40% since last July and Barclays 32%. This is partly down to good fundamental performances from the firms - Barclays recently announced that profits rose 20% to a record £4.6bn in 2004, for example - but share prices have been given an extra spark by the emergence of speculation about takeover activity. This is always around in the sector, but right now it is particularly feverish.

Thank Matt Barrett for that, says Andrew Cave in The Daily Telegraph. The chairman of Barclays Bank has been very publicly sounding a warning about the fact that UK and European banks are at risk of being "swallowed up by the huge banking groups that are emerging in America" unless they protect themselves with major pan-European mergers. Once the Americans have finished bulking up at home, he says, the natural next move is to acquire other banks globally to create a"tri-polar focus on Asia, Europe, and North and South America". Barrett isn't alone in giving these warnings, says Jason Nisse in The Independent on Sunday. A few weeks ago, Josef Ackerman of Germany's Deutche Bank used the threat of the Americans coming to justify cutting more than 6,000 jobs.

But how likely is it really that the Americans are on their way? They've been giants for ages (Bank of America picked up FleetBoston and JP Morgan Bank One last year), and so far they haven't shown much interest. The fact is that all these warnings are aimed at the Europeans in an attempt to stop them blocking bank consolidation on their continent. The chairman of La Caixa, Spain's third-largest financial group and biggest institutional investor, has spoken out against the foreign takeover of Spanish companies, points out Leslie Crawford in the FT. Any cross-border bid for these firms would mean negotiating with La Caixa, and Mr Fornesa indicated this would be "unwelcome". Spain's new Socialist government has also sparked controversy by speaking in favour of having "core Spanish shareholders" to ensure the stability of the country's financial system. And the Italian government last week signalled it would block foreign takeovers of its banks.

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But what if they now relent and there is a deal scramble in Europe? HSBC and RBS are more likely bidders than targets, and Barclays could be either, says Nisse. Indeed, RBS has been rumoured to be thinking of having a go at ABN, although HSBC might be a more likely buyer. Lloyds and HBOS are more likely to be targets than anything else. But not necessarily of the Europeans, says Heather Connon inThe Observer. Don't rule out the Americans. The mains reason for recent rises in Barclays' and Lloyds' share prices has been the City obsession with the prospect of a US bid: Citigroup and Bank of America lead the list of bidders. None of this is a dead certainty - few of the banks are cheap anymore, and given the lack of overlap between US bidders and UK targets, cost savings would be hard to find. However, for US banks looking for global reach, picking up a UK bank might not be a bad strategy.