Banking competition still strong in Scotland

LONDON, Dec 10 (Reuters) - Competition among banks in Scotland will remain strong despite the likely disappearance of the Edinburgh-based HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) following its merger with Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz), businessmen told lawmakers on Wednesday.

Iain McMillan, director of the Scottish Confederation of Business Industry (CBI), said there was still a vibrant banking sector.

"Clearly there is going to be one less high street bank if on Friday the HBOS shareholders vote in favour of the merger," he told the Scottish Affairs Committee.

"But there does seem to be that there is quite a lot of competition there, certainly in the big cities."

HBOS shareholders are due to vote on the government-brokered deal to create Britain's second-biggest bank on Friday. More than 95 percent of Lloyds investors have already voted in favour of the newly-named "superbank" Lloyds Banking Group.

The deal would leave the Royal Bank of Scotland, the Clydesdale and the Airdrie among the surviving Scottish banks.

The banks and financial services sector have been a key driver of the Scottish economy during the past decade, boosting growth by more than 90 percent since 1998 -- more than 7 percent a year.

Up to 14,000 jobs are predicted to go as part of the shake-out of the Scottish financial services sector, a report by the Ernst & Young Scottish Item Club said on Wednesday.

"The knock to our previous star performer in financial services makes this recession unprecedented," Hywel Ball, managing partner of Ernst & Young's Scottish practice, said.

Scotland is entering its first ever services sector-led recession, with its weakest performance since the early 1980s, the report added.

The growth rate is expected to be 0.9 percent in 2008, contracting to -0.4 percent a year later.

But in 2010, growth should recover to 1.5 percent and in 2011 to 2.5 percent.

The recession should be less severe in Scotland than the rest of the UK because of the country's reduced exposure to the housing market and a larger public sector, the Item Club said.

"Scotland's critical mass of banking, insurance and fund management skills, along with a reputation for low rates of labour turnover, may provide the base to retain or attract activities north of the border, with beneficial impacts to the wider services economy," Ball said.

"The key for all businesses is to be outward-looking and competitive. Those that can innovate and diversify will come out the other end of this recession tunnel in a stable or even better position than when they went in."

(Editing by Elaine Hardcastle)