Down but not out as HBOS shock takes its toll

THE pin-striped patrons of Harry's Bar don't tend to do lunch any more. They do anaesthesia. In the basement brasserie, long a popular haunt of Edinburgh's bankers, the mood has been decidedly solemn and the drinks plentiful. Take Robert, for example. Ordinarily, he'd shun alcohol during office hours. A few years ago, when he joined HBOS as a graduate trainee, the idea of daytime drinking would have been unthinkable.

These days, however, an afternoon vodka numbs the uncertainty over his future. He relocated to Edinburgh for the job, and has been struggling to pay his mortgage of late. Now, with the possible loss of his job under the Lloyds TSB takeover, he is more anxious than ever.

"My girlfriend and I both came from Glasgow hoping to make a go of things in Edinburgh, but the future now is not looking good," he said. "You can forget all the crap about masters of the universe. That's fair enough at the top of the food chain, but lower down, there's people who had nothing to do with the bad decision-making.

"The takeover is going to put our future in doubt. We're thinking about just moving back to Glasgow."

It is not yet possible to quantify the impact of the proposed takeover of HBOS, but such testimonies show turbulent times lie ahead.

The finer details of £12.2 billion deal are still being thrashed out, and Alex Salmond, the First Minister, has stated his determination to ensure the Scottish head-office operations of the new group are "as large and substantial as possible".

Nonetheless, any move to mitigate the aftershocks will find only limited success.

HBOS employs 6,459 people across 16 sites in Edinburgh, a sizeable number of whom, like Robert, fear they will not be required by the new superbank. Also threatened are more than 30,000 people in and around the capital who make their living by buying or selling financial products, the industry that is the bedrock of Edinburgh plc.

As the fourth-largest financial centre in Europe, the city is home to seven of Scotland's top 20 companies, with its bankers juggling upwards of £327 billion of funds. Such a proud status is gravely under threat.

"The repercussions are not clear at this time, but you can be assured Edinburgh is feeling the tremors first, then the rest of Scotland will follow," one senior economic analyst told The Scotsman. "Look at the plans for the new £100 million headquarters (announced by HBOS in May] in Fountainbridge. That was indicative of the Edinburgh we know, the on-the-up city. I don't think we'll be seeing that level of ambition again for a long time.

"But it's not a trend that is going to be exclusive to financial services. There are businesses and property developers already struggling, and this may sound the death knell."

The impending malaise is already rearing its head in small but telling ways. Last year's inaugural Pink Tartan Ball was a great success for Adam & Co, the Edinburgh private bank, whose staff organised it. Hosted by Andy Nicol, the former Scotland rugby captain, and featuring guests such as Sir Jackie Stewart, the charity bash at the Balmoral Hotel raised £50,000 for breast cancer research.

Twelve months on, this year's ball has been cancelled, after poor ticket sales blamed on "the present financial climate".

The cancellation is symbolic of the squeeze being felt at all levels. On Thursday, one upmarket Leith eatery, ordinarily bustling with executives, was noticeably quiet. "I think people are reluctant to come out for a meal, something they would not even have thought twice about a few months ago," the owner said. "Since the takeover of HBOS was announced, I've had clients calling up to cancel long-standing bookings.

"We're popular with people in business, but they seem to be the ones who are staying away."

Further afield, the way in which HBOS invested money suggests specific sectors will feel the squeeze more than others.

The bank carved out a reputation for working with Scotland's housebuilders and property developers, such as Kenmore and Kilmartin. Lloyds TSB has not confirmed whether it will adopt a similar approach, and Edinburgh's property market may suffer the consequences.

Savills, the property agent, reports that buyers in the city have been "more cautious" in recent weeks, and the Edinburgh Solicitors Property Centre says homes in the capital now take an average of 100 days to sell, 30 days longer than a year ago.

With a year-on-year drop in sales of about 60 per cent, ESPC has a stock of some 6,500 properties all looking for buyers.

Jonathan Fair, chief executive of Homes for Scotland, said: "HBOS has had a pivotal role within the housebuilding industry in Scotland for many years. The bank's ability to make finance available to our member companies has been essential in delivering much of Scotland's annual housing production.

"We have a vested interest in seeing a robust banking operation that is capable of supporting an industry worth more than £6 billion to the Scottish economy each year."

HBOS is also known for developing small and medium-sized businesses, another aspect of its trading ideology that Lloyds TSB may not favour.

The uncertainty claimed one of its first victims this week, when it was announced that plans by the University of Edinburgh to significantly step up its commercial arm were shelved, after the backers of the scheme – which would have created spin-out companies – failed to find the £10 million investment needed for the £25 million initiative.

At the highest levels in the capital, plans are being drawn up to weather the coming storm. In the City Chambers on Tuesday, the council ratified proposals to prepare an economic action plan, its overarching themes involving changing policy to ensure a speedy recovery from the downturn and, perhaps most vital of all, spearheading a campaign to communicate with confidence the message that Edinburgh is still open for business.

Yet the council appears to be under no illusions about the size of the challenge. It expects several future pressure areas: difficulty securing the help of the private sector and sponsorship; a reduced tourist footfall, and the threat of marginal areas of Edinburgh experiencing "decay and disrepair" as a consequence of failing businesses and lacklustre investment.

However, those charged with maintaining the health of Edinburgh's economy have offered a bullish riposte to the doom-mongers' predictions.

The local economy has grown 36 per cent, and some 85 per cent of workers in the capital are employed outside of finance.

Kenneth Low, the chief economic forecaster at Strathclyde University's Fraser of Allander Institute, said: "The Edinburgh economy is also strong in tourism, creative arts, retail, business services, higher education, and science and technology, as well as the public sector."

Ron Hewitt, the chief executive of Edinburgh Chamber of Commerce, said the city would come through the HBOS ordeal.

He said: "This was a merger, not a bankruptcy. Costs will be trimmed but not from a collapse in demand. Instead, most redundancies will come from the efficiencies created when two similar institutions merge. It's up to government to manage the environment to enable that.

"We can expect challenging times for the financial services sector. But if the Edinburgh financiers I know are anything to go by, they'll be calling on all their resilience and nous to survive and exploit the opportunities a downturn always brings."

Long way to go, but worst may be over

Kenneth Low Chief economic forecaster, Fraser of Allander Inst

WITHIN Scotland, Edinburgh is the dominant centre of the financial services industry, with 95,000 employees in the finance and business sector. Ten per cent of these are directly employed in the financial services sector itself, with many others indirectly employed.

With many banks and financial companies experiencing sharp declines in their share prices and profits, are the predictions of an implosion of the finance sector right? Not quite. There is undoubtedly a significant contraction under way in the finance sector; the extent of this is not yet quite known. Clearly, with Northern Rock, HBOS/Lloyds TSB, and the Bradford & Bingley changes, there is much to worry about.

It is expected the financial sector can recapitalise (especially with state packages) within 12-18 months, so future financial performance will probably, by mid-2009 onwards, be significantly better.

There will be little impact on the labour market other than rising unemployment given the job losses that are bound to come from the HBOS/Lloyds TSB merger.

Even while the economy slows, Edinburgh's claimant count has increased only from 1.9 per cent to 2.2 per cent and is still well below the Scottish average of 2.8 per cent. So the worst may be over, but there is still some way to go, and it is unlikely that strong growth will be seen again until towards the end of 2010.


Lots to be positive about in this great city

Ron Hewitt Chief Executive, Edinburgh Chamber of Commerce

SCOTLAND has lamented the passing of HBOS. But reports of the death of financial services have been grossly exaggerated – the track record of its corporate services is but one reason why we shouldn't lose this national icon.

There are plenty of other hopeful signs of progress elsewhere. Some 85 per cent of employees in the city are employed outside finance. This includes burgeoning industries such as life sciences, with the new Bioquarter at Little France. Hi-tech manufacturing is also doing well, with three-year growth rates averaging 5 per cent. Edinburgh is a world leader in informatics, largely because of its universities' ground-breaking technological and academic research.

Edinburgh remains a magnet for business. It has stable and sophisticated legal and financial institutions. It also stands out as one of the finest European cities to live in. We cannot underestimate the importance of such features in attracting enterprise. Talented high-earners increasingly have the power of choice over where to live. They flee pollution and crime just as their companies avoid high taxes and red tape.

We need to ensure our transport continues to improve, including committing to tramline 3; that our city is safe; that affordable new housing and commercial premises can go ahead swiftly. And we must bear down on excessive taxation and regulation. Now is the time not for despair, but to build on new opportunities.