UK's baby banks are sitting ducks for predators

At the turn of the year the FTSE stood at about 4500. Today it stands at 4420. The FTSE banking sector, a major component of the FTSE, fell 3.2 per cent between those dates. The banking, drug and telecom sectors make up about 70 per cent of the FTSE 100 and all sectors have been disappointing this year - hence UK stocks have trodden water all year.

There is little doubt that UK banks, though very well run, are now behind the curve in terms of global influence and size in comparison to the titanic operations created by the M&A activity that has taken place between Bank of America/FleetBoston, JP Morgan Chase/BankOne and Tokyo Mitsubishi/UFJ Holdings. However, the main reason given for the declining share prices of UK major banks has been the threat of rising interest rates, which increases the level of bad debts.

This must be the first time in living memory that the banking sector has been perceived by analysts as not increasing its profitability on a pro rata basis. With higher rates of interest, margins always increase.

It is generally felt that there are too many banks in the UK and some of them perform only a domestic role. In the long term, without being disrespectful, the likes of Alliance & Leicester, Northern Rock and Bradford & Bingley do not play a leading role in banking society. But they represent serious 'add-on' value to those banking titans looking to expand their distribution networks. M&A activity has been slow to come to hand in the UK.

There is a race to rush the Abbey to the altar, with Santander probably at the head of affairs. Also, Barclays and Lloyds TSB look vulnerable to predators from abroad.

Barclays looks fine value with a great domestic base, a very profitable Barclays Capital and good overseas sources of revenue, but Lloyds looks a bit one-paced. The betting set out below represents the thoughts of observers, analysts and predators in the weeks to come.