LONDON (Dow Jones)--The still-fragile U.K. banking sector is set for a major overhaul that will see two of its biggest banks getting smaller and potential new players arriving in the market--including an entity with its roots in music and a supermarket.
The Royal Bank of Scotland Group PLC (RBS) and Lloyds Banking Group PLC (LYG) are expected to disclose Tuesday what assets they will have to sell in order to satisfy European Union competition concerns, after they were bailed out by the government last year amid of the worst financial crisis on record. They will also announce their intentions toward a government plan to insure toxic assets.
The EU's competition regulator has told both banks that they must divest of businesses to make it fair to banks that stayed independent.
Lloyds, which is 43%-government owned, has said sales won't be material to the bank, while RBS, 70%-government owned, said it expects divestments "not initially contemplated."
Lloyds could be selling some retail branches and part of its small-to-midsize enterprise portfolio. It became U.K.'s biggest retail bank in terms of market share after it bought HBOS PLC in January in a government-brokered takeover. Its SME business' market share is 24%.
RBS is expected to sell dozens of retail branches in England and Scotland, as well as insurance operations and other divisions.
The number of potential buyers will largely depend on market-share limits imposed by U.K. and EU authorities, something they are also likely to announce this week.
On Sunday, Alistair Darling, U.K.'s top treasury official, told BBC that the hope is "that you would have perhaps three new entrants over the next few year."
Darling didn't give specifics but said new entrants into the sector could be some that are already in banking "and others may decide it's something they want to get into."
The British Bankers' Association said Monday that it "has always welcomed competition for high street banking services and choice for customers."
One potential competitor is already making its plans public. Virgin Group founder Richard Branson said Monday that it is interested in the assets of RBS, Lloyds and Northern Rock PLC.
"We will be setting up the new bank in the new year," Branson said in a news conference in Milan. "We may also buy some assets of the nationalized banks." Branson's Virgin empire has its roots with Virgin Records, which was later sold to help support Virgin Atlantic Airways.
Virgin was the preferred bidder for Northern Rock, the U.K. bank that collapsed in 2007, but was left out in the cold when the government said none of the rescue plans put forward provided taxpayers with enough guarantees. The bank was then nationalized.
Last week, the EU cleared a plan under which the lender will be split into a "good" bank - which will hold the bank's deposits and some existing mortgages - and a "bad" bank holding mortgages that will be gradually wound down. The plan is to sell the "good" part.
Another contender for buying assets could be retailer Tesco PLC (TSCO.LN), which has said it wants to make its personal finance business, Tesco Bank, a full service retail bank, from the smaller handful of products it currently offers.
A Tesco spokesman couldn't be immediately reached for comment.
Analysts have also said foreign banks could be among buyers, including Banco Santander SA (STD), which added ailing banks Alliance & Leicester and the good parts of Bradford & Bingley to its U.K. operations at fire-sale prices in 2008. It entered into the U.K. market in 2004 with the acquisition of Abbey National PLC.
The bank's chief executive, Alfredo Saenz, however, said last week that Santander had no plans for acquisitions "in any of our main geographical area."
New small banks formed by a consortium of investors are also in the list. Panmure Gordon banking analyst Sandy Chen is reportedly trying to set up a lender for small businesses. Chen couldn't be reached for comment.
Analysts, however, said names like Tesco and Virgin could emerge as the biggest winners because they are popular brand names that are already well received by the public.
"One thing the government can't afford to do is to be in a situation where Lloyds and RBS are forced to sell assets and then people leave the new owners in droves because they don't know who they are," said Simon Willis, an analyst at NCB Stockbrokers.
To be sure, it may take years until the new banking landscape in the U.K. becomes clear.
Although the future of Lloyds and RBS is expected to be decided shortly, implementation of any plan is likely to take years.
"Five years seems to be the benchmark for banks under the EU to reorganize themselves, so the new banking landscape won't come up overnight," Willis said.
-By Patricia Kowsmann, Dow Jones Newswires. Tel +44(0)207-842-9295, patricia.kowsmann@dowjones.com
(Sabrina Cohen in Milan contributed to this article.)
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