Lloyds Banking Group PLC (LON:LLOY) and its Scottish Widows business have decided to withdraw £109bn of assets under management from Standard Life Aberdeen PLC (LON:SLA) due to competition concerns, sending the merged fund manager group's shares sharply lower today.
The bank had agreed to keep the funds for its insurance and wealth units with the asset manager for six months after the merger of Standard Life and Aberdeen was completed in August.
The newly merged company expects to take a £40mln impairment charge following the lender’s decision to terminate the investment management arrangements with SLA for the funds.
SLA said it was “disappointed” and will be discussing the implications of the move with Lloyds and Scottish Widows.
Revenue associated with the funds represented less than 5% of SLA’s proforma 2017 full year revenue.
The funds have been run by Aberdeen since its £650mln acquisition of the asset management unit of Scottish Widows from Lloyds in 2014.
Lloyds exercises right to terminate contract
In a statement, Lloyds explained that under the terms of the takeover deal, it had agreed a contract for Aberdeen to manage £109bn of assets on behalf of Scottish Widows and the lender's wealth business.
However, the deal had included a clause that allowed the bank to terminate the contract in the event Aberdeen was subject to a change of control with a "material competitor".
“Given the merger of Standard Life and Aberdeen has resulted in our assets being managed by a material competitor, it is now appropriate to review our long-term asset management arrangements to ensure they remain up-to-date and that customers continue to receive good service and investment performance," said Antonio Lorenzo, chief executive of Scottish Widows and group director of Insurance & Wealth.
"Therefore, we will begin an in-depth assessment of the market to identify a long-term strategic partner, or partners, to manage the current £109bn of assets.”
Lorenzo said there will be no immediate changes for customers. Scottish Widows and the wealth unit expect to implement the new arrangements by the end of the first half of 2019 following completion of the review.
"Scottish Widows and Wealth will work with Standard Life Aberdeen to ensure no disruption to performance or service in the interim," Lorenzo said.
Standard Life Aberdeen shares drop
In late afternoon trading, Standard Life Aberdeen shares in the FTSE 100 index were down over 8% at 357.9p, while Lloyds shares were up 0.6% at 67.08p.
Laith Khalaf, senior analyst at Hargreaves Lansdown commented: “Losing this book of business would strike a sour note for the Standard Life Aberdeen merger, and undermines some of the rationale for joining forces, which was built on scale.
“However while almost a fifth of Standard Life Aberdeen’s assets look like they might be walking out the door, this only equates to 5% of revenues, as these investment services are relatively low margin.
“It’s also worth noting the sort of funds involved are not run by the star managers of the stable, rather they are the sort of strategies that feature in older pension contracts sold under the Scottish Widows banner.”
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