Mark Carney Hands His Gold Card to the Bankers

Cheap funding makes BoA credit card arm attractive.
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When Mark Carney rolled out cheap new funding to the banks in August, he said lenders now had "no excuse" not to pass on low interest rates and keep credit flowing in a British economy on the verge of Brexit. Funding a multi-billion-pound takeover probably wasn't what the Bank of England boss had in mind.

Lloyds Banking Group Plc, Britain's biggest mortgage lender, is in pole position to buy Bank of America Corp.'s 7 billion-pound U.K. credit card business, MBNA, according to the FT.

It's a deal with quite a few risks. Whoever buys it might have to compensate more customers for the mis-selling of payment-protection insurance, the U.K.'s costliest finance scandal. There's also the question of Britain's uncertain economic future as it prepares to leave the EU. Loan losses may rise.

But there's a sweetener here in the form of Carney's Term Funding Scheme. The 100 billion-pound ($124 billion) facility offers banks the chance to borrow for four years at about 0.25 percent. That's much cheaper than MBNA's internal funding line of about 1.5 percent in 2015, according to UBS estimates. With 4.2 billion pounds of internal funding to be refinanced, ultra-cheap credit will be useful.

Funding Cost

Estimated MBNA cost of internal funding lines, which are higher than 0.25% Bank of England loan scheme

Source: UBS

That may help sell the deal to nervous shareholders, worried about what a big acquisition means for their reliable dividends. Cheap funding would flatter the economics of an already lucrative business, even if it's being exposed to greater competition. MBNA delivers returns above its cost of equity and has double-digit net interest margins.

Plus there are opportunities here beyond the short-term bottom line. Lloyds can't avoid operating in the U.K., so it probably makes sense to try to offset any Brexit slowdown by increasing market share. Barclays Plc and Virgin Money Holdings UK Plc have already circled MBNA and there are about 40 new challenger banks nipping at the heels of established providers. Buying MBNA, with its market share of about 11 percent, would be a big boost to Lloyds' 15 percent share.


Adding MBNA would take Lloyds' share of U.K. credit cards to about 26 percent, according to Citi

Source: Citi

Not everybody is convinced, though. Some analysts worry about blowing excess capital on acquisitions when the economy is set to slow. The industry tends to be too optimistic about future loan losses. And there's also the drag from future PPI compensation costs, even if Bank of America promises to shoulder some pain.

Deal Worries

Lloyds is reportedly the front-runner to buy credit-cards unit MBNA, which is weighing on shares

Source: Bloomberg

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Yet, in theory, it makes sense for Lloyds to expand to protect its pricing power. It's shown an ability to cut costs, integrate businesses and return excess capital to shareholders. With that in mind, why wouldn't it use those cheap BoE funding lines to make those returns even better?  With the taxpayer still a shareholder of the bank to the tune of 9 percent, it would almost seem rude not to.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Lionel Laurent in London at

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