Ed Miliband, leader of the U.K.'s Labour Party, said in a speech on Friday that he thinks that the U.K. retail banking market is too concentrated, and called for the top banks to be required to give up "significant" numbers of branches. This would be on top of the approximately 630 and 320 branches that 
Lloyds (LLOY) and RBS (RBS), respectively, are already required to divest as a consequence of their bailouts during the financial crisis. Miliband called for fairly swift action, saying that his policies would see the divestitures completed within a five-year parliament.
We think politicians are unlikely to break-up the banks
We agree with Miliband that the U.K. banking market is concentrated, but think that a plan to break up the banks will very likely prove unrealistic. We see the U.K. retail banking market as a rational oligopoly. The top five banks - Lloyds, RBS, HSBC (HSBA), Barclays (BARC), and Santander (BNC) - control about 85% of the market and Lloyds alone controls 30%. We have long thought that these banks compete softly on price, and think that this soft competition is the source of the 20%-plus pre-tax returns on equity that we regularly see from U.K. retail banking.
However, we think that retail banking is a scale-driven business in which rational oligopolies appear regularly. Even in the U.S., which is seen as a more fragmented market, a few banks typically dominate any particular geography's banking market and high-quality banks can out-earn their costs of equity. In the U.K., we note the difficulty that Lloyds and RBS have had finding buyers for the branches that they are already required to dispose of - it is too costly for buyers to capitalize and run sub-scale operations, especially given consumer preferences for banks with many convenient locations. While it is clearly technically possible to break up the retail banks, we think politicians are unlikely to do so, given the uncertain benefits to consumers and the clear costs to the economy. We plan to maintain our moat ratings, including our narrow moat rating for Lloyds.
As an aside, we think that Miliband may misunderstand the U.S. 10% bank market share cap, which he cited as a potential model. In the U.S., banks are not allowed to grow through acquisitions if their national deposit market share is greater than 10%. They are, however, allowed to grow organically whatever their market share, and are allowed to remain intact even if their share exceeds 10%.
