The latest big bank merger is happening across the pond where Lloyds TSB is buying HBOS in an all-share transaction valued at £12.2 billion (US$22 billion).

There was a good deal of concern that HBOS would be the next big bank to fail. In response to the deal, the UK’s Financial Services Authority said, “The announcement of the proposed merger with Lloyds TSB is a welcome move as it is likely to enhance stability within financial markets and improve confidence among customers and investors in the UK financial sector.”

Meanwhile, Fitch Ratings placed both firms on Rating Watch Negative. Fitch said it considers Lloyds TSB, the smaller party in the merger in terms of consolidated assets, to be a very conservatively-managed bank that has been relatively unaffected by the credit crisis.

“While the equity-funded nature of the transaction is supportive of current ratings, the Rating Watch in respect of Lloyds TSB reflects Fitch’s concerns over the potential impact on the group’s credit profile of owning lower-rated HBOS,” it said. It also reflects the integration risks in undertaking such a substantial transaction at a time of extraordinary financial market turbulence.

The rating agency said that HBOS’ existing ratings, “reflect its high exposure to the deteriorating UK property market and relatively greater reliance on the stressed wholesale funding markets to finance its customer lending.”

“The rating actions in respect of HBOS reflect primarily the execution risk of such a substantial transaction in volatile and unpredictable markets. There is clearly strong political will within the UK to support the acquisition, but the transaction is not expected to close until late 2008 or early 2009,” it notes.

Fitch added that it believes that news of the acquisition, “ought to alleviate the risk that recent market speculation around HBOS will spill over into a sustained weakening in the confidence of the group’s creditors. However, this cannot be assured in the current volatile markets. Recent market speculation surrounding HBOS has been in marked contrast to Fitch’s view of HBOS’s risk profile as a well-capitalised and profitable bank, with a strong UK franchise and decent, albeit deteriorating, asset quality.”

IE