Santander fury about deal to secure Lloyds 'HBOS takeover

Banco Santander, the owner of Abbey, is said to be furious about the Government's decision to waive competition rules for Lloyds TSB's £12bn takeover of Halifax Bank of Scotland. Spain's biggest bank has agreed to buy Alliance & Leicester but would have considered a bid for HBOS instead if it had known the deal might be allowed.

Santander was seen as a potential bidder for HBOS in recent days but decided that adding Britain's biggest mortgage lender to Abbey and A&L would make it too big in the UK. Santander believed that its swoop for A&L, approved by shareholders this week, was the biggest deal available for it to add to Abbey, which it bought in 2004. The Spanish bank will now lag way behind Lloyds-HBOS.

Sir Victor Blank, Lloyds TSB's chairman, said yesterday that Lloyds had thought about combining with HBOS for many years but had assumed the authorities would not allow the creation of a UK banking giant. But the market turmoil engulfing HBOS this week presented Lloyds with the chance to do the deal.

Big banking takeovers were in effect barred in 2001 when the Competition Commission ruled against Lloyds' hostile bid for Abbey National. The Government plans to change competition laws to get the current merger through on the grounds of protecting financial stability.

The Office of Fair Trading said it would review the takeover despite the Government's decision.

Rival banks, presented with Lloyds' massive market share and promises to keep growing, are likely to voice concerns about the "superbank" created by the deal. The takeover will make Lloyds number one for current accounts, mortgages, savings, unsecured lending and household insurance, with massively improved market shares. Its share of the all-important current account market alone will be 35 per cent and it will have about 28 per cent of mortgages.

Lloyds said it did not intend to reduce the combined group's lending in any segments.

Lloyds' shares jumped more than 10 per cent after the deal was announced yesterday morning as investors gave their approval to the bank's cut-price move to become Britain's dominant commercial bank. But Lloyds closed down 15 per cent at 237.5p, the second biggest faller in the FTSE 100, after concerted action by central banks to boost liquidity in the market had no effect. The fall wiped nearly £2bn off the value of Lloyds' all-share offer for HBOS, valuing the deal at about £10.4bn. HBOS shares rose 17 per cent to 172.6p, compared with the 197p value of the bid.

Lloyds has been raising funding in the markets more easily and cheaply than HBOS but the spike in money market rates raised concerns that Lloyds might not be able to support HBOS's massive balance sheet.

Simon Maughan, banking analyst at MF Global, said: "At around 12.30, US futures started falling quite sharply and suddenly the funding issue was a big thing and people started saying, 'Lloyds can't fund HBOS – let's sell the shares.'"

The cost for banks of borrowing sterling for three months rose from 5.871 to 5.977 per cent yesterday, the highest rate this year.

Moody's and Standard & Poor's both said they were reviewing Lloyds credit rating for downgrade because of the deal.

Eric Daniels, chief executive of Lloyds TSB, said the combined bank would have "robust" capital strength and £80bn of liquid reserves. "That is a lot of money," he added.