Lloyds TSB is considering a bid for Deutsche Postbank, Germany's biggest retail bank, to put into action its long-held ambition to expand internationally.
A deal, which could cost €12bn (£9.5bn) would be a massive undertaking for Lloyds. The bank has looked at Germany before and had talks with Deutsche Bank earlier this decade. The lender would give Lloyds more than 14.5 million customers and 850 branches in Europe's biggest economy. Britain's biggest bank for current account customers is open to opportunities to take advantage of its relatively strong position in a sector battered by the credit crunch.
Postbank has been up for sale since its owner, Deutsche Post, signalled last year that it was open to offers. Lloyds could find itself up against German competitors to secure Postbank. Commerzbank has said it would be open to a three-way merger with Postbank and Dresdner Bank. Commerzbank is said to be looking at Dresdner's books with a preference for buying Dresdner and launching a combined bid for Postbank.
Eric Daniels, Lloyds' chief executive, has said that Lloyds has room to grow in the UK during an economic slowdown and does not need an acquisition. But the group is looking for opportunities to apply its abilities in large-scale retail banking to other markets.
After taking over as chief executive in 2003, Mr Daniels sold outlying businesses in New Zealand and Latin America to protect the bank's dividend and focus on the UK. With the core retail banking business now outperforming rivals, he has said he will consider moving to the next stage of his plan by looking for international deals.
After years of modest growth as its rivals tapped the booming markets for cheap debt, the credit crunch has left Lloyds in a strong position. With strong capital ratios and comparatively little exposure to structured credit, the bank has boasted that it is open for business, funding itself and taking market share.
Lloyds' upbeat assessment of its prospects contrasts with Royal Bank of Scotland, HBOS and Bradford & Bingley, which have all announced rights issues to shore up their capital strength. Those cash calls would leave Barclays' capital ratios looking thin in comparison. At the weekend, the bank fuelled speculation that capital raising was in the pipeline. Rather than announce a problematic rights issue, Barclays is looking to tap sovereign wealth investors from Asia or the Middle East.
Marcus Agius, Barclays' chairman, told reporters in Kuala Lumpur that there was nothing to fear from the wealth funds, which are state-owned. "As long as they continue to act responsibly, which I'm sure they will, they will be seen for what they are—pools of capital which will be applied intelligently around the world," he said.
Mr Agius added his comments did not relate to Barclays' capital position and were "generic".
Barclays attracted £2.5bn of strategic investments from China and Singapore last year. To placate other shareholders, the bank could sell new shares to sovereign funds at a premium to its depleted share price and allow existing investors to increase their stakes.
The market already expects Barclays to announce a sovereign investment. The bank's shares rose just 1 per cent on Friday, when stocks of companies facing rights issues surged after the regulator clamped down on short selling during rights issues.
Like Lloyds, Barclays is keen to portray itself as being in a strong position. The bank has acknowledged that with its equity tier 1 ratio hovering around 5 per cent and others targeting more than 6 per cent, it now stands out. But Barclays' chief executive, John Varley, has said that any capital raising will be from a position of strength and will support growth plans.
Barclays shares have lost 37 per cent this year, while Lloyds, which rose 0.7 per cent on Friday, have slipped 25 per cent.