Michael Harrison's Outlook: Crosby should resist urge to join the Big Four

Bank A is worth ?28bn and Bank B ?23bn. Which is the bigger of the two? The answer, of course, is Bank B. Hang on, let's try that again. Bank A has 23 per cent of the UK mortgage market and Bank B has 9 per cent. And the larger one? Yup, you're getting the hang of this, it's Bank B.

Bank A is worth ?28bn and Bank B ?23bn. Which is the bigger of the two? The answer, of course, is Bank B. Hang on, let's try that again. Bank A has 23 per cent of the UK mortgage market and Bank B has 9 per cent. And the larger one? Yup, you're getting the hang of this, it's Bank B.

James Crosby, the chief executive of Bank A or, HBOS to use its real name (Bank B, incidentally, is Lloyds TSB), says he was misreported last week when everyone took his remarks about Abbey National to mean that he was not contemplating a counter-bid for the business. After a weekend of press speculation to the contrary, he set the record straight yesterday with a statement confirming that HBOS was indeed in the preliminary stages of reviewing whether a combination with Abbey blah, blah, blah.

When Mr Crosby implied last week that none of the UK's large banks had a cat in hell's chance of getting a bid for Abbey past the competition authorities, he wasn't including l'il old HBOS. No sirree. Pay attention. He was talking not about "we" but "they". In other words the "big four" consisting of HSBC, Royal Bank of Scotland, Barclays and, last and in some respects least, Lloyds TSB.

What, then, of his comment that "I" am not going to lured into bidding by fee-hungry investment bankers? Simple. Mr Crosby was referring to European cross-border mergers of the sort which Spain's Santander is now trying to pull off with Abbey. On the other hand, he is only too happy to hire Lazards to advise him on a spot of cross-border activity between Scotland and England.

When Bank of Scotland got together with Halifax on the rebound from its failed courtship of NatWest, the idea was to create a new "fifth force" in British banking. Now that HBOS has achieved that goal with 14 per cent of the current account market, it would rather like to become a fully paid-up member of the big four, supplanting Lloyds TSB in the process.

A combination of HBOS and Abbey would have an eye-watering 37 per cent of the UK mortgage market and about 20 per cent of personal banking - only a couple of percentage points less than Lloyds has now - making a Competition Commission referral a slam-dunk. Just to muddy the waters and make absolutely sure that HBOS was referred, Barclays and RBS might decide to throw their hats in the ring as well and join HBOS in front of the beak. Perhaps even Lloyds TSB might be tempted to try its luck again, notwithstanding Eric Daniels's acknowledgement that its chances of success would be slim.

Before you know where you are, it could turn into the banking equivalent of the Safeway takeover saga, and everyone knows how that ended.

HBOS says that it is not so much a question of raw market share but how you use that power, pointing to all the customer-friendly initiatives it has pioneered in retail banking, such as interest-bearing current accounts and competitive overdraft rates. But if it was promoted to the ranks of the big four, with a cost base to match, how long before the temptation to collude became greater than the impetus to compete?

The bank also reckons that its enormous share of home loans would not be an issue because of the intensely competitive nature of the mortgage market and the ease with which borrowers can now compare deals and switch to other lenders. But could the commission really countenance one organisation accounting for four in every 10 UK mortgages?

In making known his interest in Abbey while at the same time keeping his options open, Mr Crosby is undoubtedly seeking to test the political and regulatory waters. Given that the only sure-fire winners in a bidding war for Abbey involving a rival UK bank would be the lawyers and investment bank advisers, Mr Crosby might be best advised not to take the plunge.

Bumper bank profit

What's this? A big, bad British bank making ?354 a second? That's even more than David Beckham earned last season. In other countries, the ?5.2bn profit which HSBC recorded for the first half of the year would be a cause for pride and celebration. Not here, where it is automatically assumed that the profit was made by gouging customers and persuading them to accumulate much more debt than is good for them - ?1 trillion's worth and counting. In fact, only a fifth of HSBC's profits come from the UK, and the profit from personal customer banking only came to ?400m in the six-month period. That translates to a rather less racy ?25.30 a second or ?1.54 per customer per week.

The surge in profits was also due, in large part, to HSBC's successful $14.8bn acquisition of Household, a US bank, last year. The deal increased HSBC's bad debts because Household lends to what is politely termed the "sub-prime" sector of the market. The takeover could, therefore, have gone wrong, but it hasn't, and Household contributed $1.9bn to the first-half profit figure, making the US the bank's single biggest market, accounting for about a third of total earnings.

The fact that UK banks are some of the most profitable will be underscored today when Royal Bank of Scotland reports and again on Thursday when Barclays produces its first-half figures. As with HSBC, Royal Bank's profitability comes in no small measure from the US where it, too, has been on the takeover trail, swallowing up first Citizens Bank and then earlier this year Charter One.

HSBC and Royal Bank have been able to expand so aggressively overseas because of their strong home base, which in HSBC's case, at least, means the Far East as much as the UK.

Britain is a good place to be a bank for two particular reasons. First, it is a defined geographic market dominated by a handful of big players with plenty of reach. Contrast that with the US retail banking market, which is still tremendously fragmented and regionalised. Second, the regulatory environment here is relatively benign unlike, say, Germany where commercial banks are hugely handicapped by state-subsidised, government-owned savings banks.

But the likes of HSBC have also been able to expand because of balance sheet strength born out of conservative banking strategies. Since the last downturn, British banks have led the world in credit scoring, meaning that they have lower bad debt provisions than almost all their counterparts.

No one is saying that the big British banks get everything right. For instance, the time it takes for cheques to clear remains a scandal and a handicap to hundreds of thousands of small businesses and sole traders, as the Governor of the Bank of England, no less, has observed. But the UK's banking sector has been investigated perhaps more thoroughly than any other - by Cruickshank once and by the Competition Commission twice, and taken most of the lessons on board.

In their pursuit of ever-bigger profits, Britain's two banking knights, HSBC's Sir John Bond and Royal Bank's Sir Fred "the Shred" Goodwin, will continue to get more out of fewer employees. But the result is an industry which stands comparison with any elsewhere in the world.

Next time you are queuing to make a deposit at your local HSBC, it may not feel like that, but it is the reality.

m.harrison@independent.co.uk