Magazine article American Banker

Testing the City's Mettle; London's Staid Commercial Banks Have Quickened Their Stride before the Race Gates Open to Sleek Outsiders

Magazine article American Banker

Testing the City's Mettle; London's Staid Commercial Banks Have Quickened Their Stride before the Race Gates Open to Sleek Outsiders

Article excerpt

Testing the City's Mettle

London's staid commercial banks have quickened their stride before the race gates open to sleek outsiders.

EVERYONE IN THE SQUARE Mile is watching everyone else out of the corners of their eyes, fearful of missing a trick. Nowhere is wariness more acute than among those institutions at the heart of the City of London's financial system, the big British commercial banks, the so-called clearers.

More staid creatures it is hard to imagine, yet the two largest clearers moved remarkably quickly to prepare for the Big Bang. As early as March 1984, Barclays Bank announced the first ever three-way link in Britain between a bank, a stockjobber (market-maker) in shares), and a stockbroker. Through its merchant (investment) bank it bought 29.9%, the maximum permitted, of Wedd, Durlacher, Mordaunt, the City's largest jobber, and 5% of de Zoete & Bevan, one of the largest stockbrokers.

In April this year, when the rules had been relaxed, Barclays increased its stakes. But unlike its marginally bigger rival, National Westminster Bank, it has not gone for full ownership.

It now has just over 80% of a new conglomerate, Barclays de Zoete Wedd (BZW)--known in the City as Bumble--with the remaining shares held by high-powered staff, thus giving the brokers and jobbers who joined a continuing interest in the profitability of the firm. With 1,300 employees, Bumble is capitalized at 240 million British pounds (about $360 million).

NatWest claims it is steering a middle course, partly buying expertise, partly building it up in-house. But it, too, has bought both a jobber and a broker--and, in its case, full control of them. Its acquisitions may not be quite as illustrious as Barclays', but they are still high-ranking. Its jobber, Bisgood Bishop, is London's fifth largest and top dog in unlisted securities, where NatWest's own investment arm, County Bank, is also strong.

The two other major clearers have taken different routes. Midland Bank already had a blue-blooded investment house in Samuel Montagu, a member of London's elite accepting house club, to which belong the most exclusive of the merchant banks that guarantee bills of exchange, the so-called bills on London. It has been content for Montagu to buy 100% of W. Greenwell, one of the biggest brokers with a well-earned reputation in the gilt-edged market, and a guru, Gordon Pepper, among its senior partners.

Greenwell Montagu, like the Barclays and NatWest securities offshoots, is doing trial runs in some of its parent's High Street branches to see how best to capture the new found enthusiasms of the British public for share-buying, which a long bull market and successful privatization issues like British Telecom have bred.

Lloyds Bank, the smallest of the four big clearers but arguably with the strongest balance sheet, has been the cautious one. It was even without its own merchant banking subsidiary until last year, and it is building up its position from scratch. Brokers were too expensive to buy, it says, and it intends to expand business at its own pace.

City Deals Costly

Indeed, Lloyds has backed the trend not only by its relatively modest plans for investment banking, but also by its surprise bid for Standard Chartered, which is strongly entrenched in Africa and Asia. While most banks were arguing that what lending is left to them is less profitable and less attractive than before, along came Lloyds prepared to put lots of money into trade finance and other traditional banking services in third world countries.

Could Lloyds be right? The big City deals have certainly been costly. Barclays is said to have spent more than 100 million pounds in cash on goodwill alone [i.e. on buying trading names and people, before the costs of constructing the new group]. City eyebrows were raised when it and NatWest rushed to buy both a jobber and a broker. …

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