We all know how flighty the big banks are, and now they’re at it again. Although in this case, they have a good reason to be on their toes.
Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) and Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) are preparing to abandon the Scots if they vote for independence.
Insurer Standard Life has already got its running shoes on, just in case.
This means a newly independent nation could face losing its three biggest financial services companies shortly after going it alone in today’s competitive global marketplace.
Edinburgh-headquartered Lloyds and RBS employs 27,500 in Scotland between them. Any move move will be bad news for Scotland, but what does it mean for investors?
Break For The Border
There’s a chance that the threatened departure of the two state-backed banks could help sway the Scots to say No, so in that respect they could be their own saviours.
Yet I’m surprised they have broken cover so openly. The independence debate is getting quite heated, and Yes or No, they could easily suffer a nasty backlash from their more Nationalist customers.
Some could even accuse Lloyds and RBS of treachery, and close their accounts in disgust.
They can probably live with that. After all, just 4% of RBS’ retail and small business accounts run are in Scotland.
No wonder they want to head south.
A Legal Matter
Will the move cross-border really be that dramatic? As former chairman Sir George Mathewson has pointed out, RBS already has major head office operations in London.
RBS, based in Scotland since 1727, said it intends to retain “a significant level of its operations and employment in Scotland”.
Lloyds has stressed that this will be a legal procedure, with little immediate impact in the way it does business.
The banks certainly won’t be removing their branch networks south of the border.
Run, Scotland, Run
The banks are ready to cut and run because they fear their credit ratings could be downgraded if they remain in Scotland.
If Scotland continues to use the pound, but on an informal basis, the Bank of England can’t be relied upon to protect them in the case of a run on the banks.
Given that the Scottish financial services sector is 12 times GDP, more than Iceland’s eight times at the height of the financial crisis, there is a clear, present and past looming danger.
The cost of insuring RBS debt has already started creeping up.
At least the banks have removed all doubt about their intentions. If Scotland quits the UK, they quit Scotland.
Investors like clarity. The banks’ shares are up around 1.5% this morning.
Politicians Talk, Money Walks
A Yes vote will still leave investors mired in uncertainty.
There will be a cost to moving their holding companies, which analyst Bernstein calculates at a cool £1bn each.
The process of shifting their legal headquarters to a different country will be a drawn-out affair. The banks will press the government to introduce legislation that would speed up the process of relocating to London.
Investors hate uncertainty.
Quit The Quitters
Lloyds and RBS have served up enough trouble over the last few years, with mis-selling and rate-rigging scandals, costly fines, shaky profits and the shadow over how they’re to be sold back into the private sector.
Throw in the Scottish problem, and it will be too much for all but the hardiest investors.
Especially if the death of the union it causes a recession in Scotland and triggers a downturn in England, which would hit the banks’ retail and SME profits.
Even if the Lloyds and RBS do quit Scotland, investors may still be ready to call it quits.
