Proposed merger between Abbey National plc and Bank of Scotland

No. ME/00295

Report under Section 125(4) of the Fair Trading Act 1973 of the Director General's advice, given on 30 January 2001, to the Secretary of State for Trade and Industry under Section 76 of the Act 

Jurisdiction

The merger satisfies the gross assets test of the FTA. The ECMR does not apply.

The parties

Abbey National plc (Abbey) is a bank providing a wide range of personal financial services products, including current accounts, residential mortgages and savings products. It has some 750 branches in the UK, 62 of which are in Scotland. In the year ended 31 December 1999 its turnover was £3,756 million; it had pre-tax profits £1,783 million and gross assets £181 billion.

Bank of Scotland is a bank with some 350 branches in the UK, of which only 29 are outside Scotland. In the year ended 29 February 2000 its turnover was £2,371 million; it had pre-tax profits £911 million and gross assets £72 billion.

Assessment

Relevant markets

The parties overlap in the provision of a wide range of banking services in the UK. The product markets in which there are significant (i.e. greater than 1 per cent) overlaps between them are current accounts, mortgages, credit cards, unsecured personal loans, motor finance and asset/leasing finance. Abbey currently has a minimal presence ([not greater than 1 per cent - see Note 1]) in the SME banking sector.

So far as the geographic market is concerned, I have considered the possibility that branding, and a preference by Scottish people for Scottish banks, might mean that the Scottish market should be considered separately. Regional or local factors might be particularly relevant in the market for current accounts, where a significant proportion of customers are likely to attach importance to access to traditional branch networks. However, means of both price competition (such as interest rates and charges) and non-price competition (such as advertising, service levels, and product characteristics) are set at a national level, indicating that a UK-wide market definition is the most useful frame of reference for assessing competitive pressure. The fact that a number of banks operate throughout the UK (i.e. including Scotland) seems likely to constrain any theoretical ability to discriminate against their Scottish customers.

Horizontal issues

The three areas of overlap in which the parties' combined UK market share is highest are: total stock of residential mortgages (market share 16.3 per cent, increment 3.2 per cent - see Note 2); point of sale finance for used cars ([market share in range 20-25 per cent, increment in range 5-10 per cent - see Note 3]); and asset/leasing finance, including motor fleet management (market share 16.5 per cent, increment 5.1 per cent - see Note 4). These market shares and increments do not appear high enough to give rise to significant competition concerns in those markets, and there are substantial competitors in each of them. In the mortgage market, for example, there have been a number of recent entrants. Bank of Scotland is a relatively small player in the market. Abbey is a more significant player, but its share of total mortgage stock has diminished in recent years in the face of competition from both new entrants and existing players.

The parties' combined share of the UK market for current accounts would be less than 10 per cent. In Scotland, the merger would give rise to a combined market share of approximately 27 per cent, with an increment of slightly less than 3 per cent (see Note 5). Barriers to entry to the current account market are considerable; the major banks, with their substantial branch networks, have a significant first-mover advantage, and there is a high degree of inertia amongst their customers. According to a recent survey carried out for the Department for Business, Enterprise and Regulatory Reform, only 6% of customers questioned had switched their current account provider in the last 5 years (see Note 6). Nevertheless, the merged entity would be subject to competition from a number of substantial actual competitors in Scotland as in the rest of the UK, while banks such as Barclays and HSBC (which currently have a minimal presence in Scotland) might be seen as potential competitors there. As indicated above, prices and service levels are set at a national level. I do not consider, therefore, that there are grounds for concluding that the merger would have a significant adverse effect on competition in the provision of current accounts in Scotland.

While Abbey's presence in SME banking has been minimal, it should not be discounted as a potential competitor. A merger could lead to the elimination of that potential competition. On the other hand, it could bring about the extension of the service which Bank of Scotland currently offers to SMEs from its Scottish branches to the rest of the UK via Abbey's branch network.

Access to a branch network is important in the markets for current accounts and SME banking. The parties' present branch networks are largely complementary in terms of location, with Abbey's being predominantly in England while Bank of Scotland has only 29 branches outside Scotland. Their combined share of bank branches exceeds 10 per cent only in Scotland, where it would be slightly in excess of 25 per cent, with the increment created by the proposed merger being less than 5 per cent. A high proportion of Abbey's branches in Scotland are located within 1km of a Bank of Scotland branch; however, for all but one of these branches, there would be branches of at least two other competing clearing banks within 1km. The effect of the proposed merger on customer choice would therefore be limited, even in the one part of the UK where there is a significant overlap between the parties' branch networks.

Vertical issues

The proposed merger would not appear to have any adverse impact in terms of vertical issues.

Other issues

Some concern has been expressed about the consequences of the proposed merger for the parties' branch networks, and thus for customer choice and employment in the banking sector. However, the geographical overlap between the Abbey and Bank of Scotland networks is relatively limited. In any event, it is generally the case that competitive markets best deliver customer choice and employment opportunities.

The view has been expressed that a merger between Abbey and Bank of Scotland could enhance competition in the banking sector, by creating a substantial competitor to the four large clearing banks. That may or may not be the case.

Third party views

I have received a small number of representations from organisations representing finance industry employees and bank customers. The issues which they have raised have been taken into account under the heading of 'Other issues' above.

Conclusion

The proposed merger would not increase UK market shares sufficiently to raise competition concerns in any of the areas of overlap between the parties. The merged entity would have approximately 27% of current accounts in Scotland, and its share of bank branches in Scotland would be at a similar level. Nevertheless, in the light of the above assessment, I do not believe that the proposed merger would have a detrimental effect on competition in Scotland or elsewhere in the UK.

I therefore conclude and recommend that you should not refer this proposed merger to the Competition Commission.

Notes

1. Source: Abbey National submission. More precise figure omitted at parties' request.
2. Source: Abbey National Annual Report 1999/Datamonitor.
3. Source: Sewells Surveys/Abbey National estimates/Finance and Leasing Association. More precise figures omitted at parties' request.
4. Source: Abbey National and Bank of Scotland estimates/Finance and Leasing Association.
5. Source: MORI.
6. Source: 'Switching Suppliers' - a research study commissioned by the Department for Business, Enterprise and Regulatory Reform, November 2000.

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