It took only two days to tie up the sale of Britain’s seventh-largest bank. António Horta-Osório, the chief executive of Abbey, phoned David Bennett, Alliance & Leicester’s (A&L) boss, on Friday evening after the stock market had closed to tell him that Santander, the Spanish banking giant, planned to make an offer for the smaller British bank.

Santander knew what it was doing. The bank had combed through A&L’s books last December and now needed only to check on items such as treasury assets, which could have deteriorated in the intervening six months. By Sunday afternoon, Santander and its advisers at Merrill Lynch had completed due diligence. The deal, under which Santander will pay almost £1.3 billion for A&L, was sealed at 2am on Monday.

This is a Spanish triumph. Last December a bullish A&L is thought to have rebuffed a £2.7 billion offer from Santander, which owns Abbey in the UK. This weekend, however, the bank’s management was forced to admit that the small, relatively undiversified lender was unlikely to survive in the continuing credit market turbulence. A&L was funded up until the second quarter of next year but had struggled to secure that capital and Mr Bennett knew that future borrowing would be even more difficult and expensive, making it impossible to compete on lending with bigger rivals.

“The concerns were about the outside environment,” the A&L chief executive said yesterday. “We feel it’s a good deal at a fair price. These are turbulent times and when we look forward it’s not clear when that turbulence ends or reduces.”

Santander coveted A&L’s 254 branches, particularly those in the Midlands, on the South Coast and in Northern Ireland, and its expertise in business banking. The Spanish bank is confident that it can cut between £30 million and £50 million of fat from A&L’s operations even before integration begins. Then Abbey’s chief executive can take advantage of the massive buying power of the world’s seventh-largest bank, which undertakes all treasury and IT activities as a group.

Santander expects annualised cost savings of more than £180 million at the combined banks by 2011. Analysts at Keefe, Bruyette & Woods described these targets as “not overly ambitious”. Mr Horta-Osório has already overseen Britain’s biggest IT migration, when he moved 11 million Abbey customer records to Santander’s systems.

Santander will also cut about 10 per cent over two years from the banks’ combined balance sheet of £250 billion, in part by selling treasury assets.

The Spanish bank, founded by the BotÍn family and chaired by Emilio BotÍn, does not like complex investments, of which A&L holds about £12 billion. Mr Horta-Osório is ready to take losses by selling the assets into the current troubled market. Santander will pump £1 billion into Abbey to cover about £500 million of already-flagged writedowns that have yet to hit the profit-and-loss account, as well as the cost of further impairments and £300 million of restructuring costs. The remainder will be used to help A&L’s equity Tier One capital ratio, which was 6.4 per cent at the end of 2007 but is since thought to have slumped back below 6 per cent.

In the first quarter Abbey punched above its weight in mortgages, taking almost 16 per cent market share, up from close to 5 per cent the previous year. The Office of Fair Trading is expected to pay close attention to any reduction in consumer choice in the mortgage market. Although an Abbey-A&L combination does not breach the 25 per cent threshold for referral to the competition authority – the banks will have 8.1 per cent of the deposit market, 12.9 per cent of mortgages and 8.2 per cent of personal loans – the OFT sees current accounts as a “gateway” to other financial products. A banker said: “They don’t just take a formulaic ‘is it 25 per cent’ approach. They’ll look at whether the end of A&L’s independence has a big impact on the current account market.”

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