Not too long ago, people would confidently assure you that the Bank of England, at that time under Treasury auspices, would never countenance a takeover of Barclays or NatWest. These were, after all, Britain’s two biggest banks and as such were considered core to the country’s banking system. How times change. Today HSBC Holdings and Lloyds TSB outrank Barclays and NatWest in size, the Bank of England has obtained its independence and there is precious little the poor Old Lady could do to block a merger among any of the banks – Brussels, in the case of a cross-border takeover, and the UK Monopolies and Mergers Commission have the final word on that. The Bank primarily concerns itself with the suitability of ownership and, after the embarrassment of the BCCI affair, it could be expected to pass a fine tooth comb over any bid. But few would cast doubt on the “fit and proper” credentials of any UK bank, so with that layer of potential opposition out of the way, future consolidation in the British banking industry really comes down to reading Martin Taylor’s thoughts. Will Barclays’ chief executive go for NatWest? As late as last December, Taylor was dropping hints to that effect, promoting the concept of a “national champion” bank to compete with newly emerging giants such as Switzerland’s UBS-SBC and Chase-Chemical. “There are far too many banks in Europe,” he said. “When the euro comes there will be a single European payments system and that’s going to drive a single European banking system. That in turn will drive considerable consolidation.” Taylor has further titillated shareholders by assuring that there are ways of designing responses to any MMC challenge to a merger on competition grounds, although he acknowledges that any marriage of two large banks would have to be between consenting adults. “A lot of people are studying the monopolies and franchise issues of any combination of UK institutions, but with the focus clearly on NatWest,” says John Leonard, banking analyst at Salomon Smith Barney. “There is a perception that NatWest is underperforming, and the relative movement of the share price until late last year had left it acquirable on a share exchange basis. I think a number of players would be running their rule over it to see if there is a way to address the very real issues of concentration in the business banking arena.” NatWest, although similar in size and mix of business to Barclays, never really had the sparkle of its chief rival. The clean-up and streamlining exercise that all banks have gone through over the past few years has been more disruptive to NatWest, and the costs of extracting from the US were of a much bigger order of magnitude than Barclays had to endure when trying to extract itself from France. Hence NatWest’s higher cost ratios. A combined Barclays-NatWest would account for more than 50% of Britain’s small corporate business and this would be likely to raise the hackles of the Department of Trade and Industry’s Margaret Beckett. She has shown herself to be capable of taking a hard line on monopolies issues and has vetoed several large deals since taking over at the DTI, including Bass’s proposed acquisition of Carlsberg Tetley. But Barclays and NatWest together would still rank about £3bn behind Lloyds TSB’s £40bn market capitalisation, as well as that of HSBC despite the collapse of its market cap from about £60bn to £40bn in the wake of the Asian currency crisis. In other areas, a Barclays-NatWest merger would go a long way towards achieving the rationalisation and streamlining that investors say is needed in the banking industry. On the one hand it would concentrate the declining number of physical branch transactions into a smaller number of units without having to give up coverage anywhere in the country. The logic is simple: if Barclays takes its existing network and closes a branch in Penzance, for instance, its customers are likely to take their account to the nearest NatWest. If, however, Barclays happens to own NatWest, it can close one of its branches and service the customers of both banks. “The retail side is a high-volume business so extra size can be an advantage in that the more you can squeeze through the system the more money you make,” says Tim Clarke, analyst at Nikko Securities. “The problems arise when you get into quality business, as it is not so easy to double the quality of the advice you give just because you double the number of your customers.” Clarke believes a Barclays-NatWest merger and the creation of an even more faceless and impersonal entity could in the longer term spark an exodus of customers. “There is a serious risk of customer disenchantment, and with the growing shift towards electronic banking, the ultimate beneficiary could be someone such as Midland’s First Direct,” he says. A Barclays bid for NatWest could touch off a round of bank mergers well beyond Taylor’s expectations. Of course, Midland and its parent HSBC, not to mention Lloyds TSB, are not likely to sit by and wait for disgruntled customers from a combined Barclays-NatWest to fall onto their plates. Lloyds TSB would probably respond by redoubling its own thinking on consolidation, while Salomon’s Leonard believes they might expect a call from one or two of the other banks. Lloyds TSB’s Sir Brian Pitman would probably not be tempted to launch a counter bid for NatWest against Barclays. He would want to avoid a repeat of the confrontation he faced with the MMC at the time of Hongkong and Shanghai Bank’s takeover of Midland, when he indicated his intention to get into the fray but was dissuaded by the threat of a monopolies inquiry. Instead, he might be more inclined to mop up someone such as the Halifax, whose high-yielding business mix fits well with Pitman’s focus on shareholder value. In any event, the chances of the face of UK banking remaining static over the course of the year seem quite remote. Jules Stewart is a freelance journalist.