Shares in Standard Life Aberdeen declined as much as 10% in early morning trading after Lloyds Banking Group announced it is to withdraw £109bn of assets currently managed by Standard Life Aberdeen for Scottish Widows.
In a stock exchange announcement, Lloyds said it has been reviewing its Scottish Widows Wealth business including the legacy assets run by Aberdeen entities, and as a result, it has given Standard Life Aberdeen a 12-month notice period for the termination of current arrangements. Lloyds said the assets were now being run by "a material competitor" following the merger of Standard Life and Aberdeen last year.
Standard Life Aberdeen will take an "impairment charge of £40m on the intangible asset" relating to the Lloyds customer relationship but also pointed out the £109bn will only affect 5% of the revenue for the 2017 financial year.
It currently runs £176bn in insurance assets and £646bn in total across the group meaning the £109bn will amount to nearly 17% of current assets under management.
Shares in Standard Life Aberdeen dropped by as much as 10% when markets opened before rebounding - they were down 4.8% by 9.45am (GMT) to trade at 370.9p, while Lloyds shares were up 1.6% to 67.6p.
Keith Skeoch and Martin Gilbert, Standard Life Aberdeen's chief executives said: "We are disappointed by this decision in the context of the strong performance and good service we have delivered for Lloyds Banking Group, Scottish Widows and their customers. We will be discussing the implications of this with Lloyds and Scottish Widows."
Investment Week understands the majority of assets Aberdeen Standard Investments manages for Scottish Widows are invested in strategies like passive equity and 'buy and hold' UK fixed income, and high-profile retail managers such as Devan Kaloo (emerging markets), Hugh Young (Asia Pacific), Harry Nimmo (UK smaller companies), Mike Brooks (Diversified Growth), Brett Diment (EMD) and Guy Stern (absolute return) will not be impacted.
Scottish Widows entered into the partnership with Aberdeen following the sale of Scottish Widows Investment Partnership in 2014. This included the long-term contracts for the management by Aberdeen of over £100bn of assets on behalf of Scottish Widows and Wealth.
However, these contracts enabled Scottish Widows to terminate the contracts in the event that Aberdeen was "subject to a change of control with a material competitor", according to a statement from Scottish Widows.
At the time of its merger with Standard Life on 14 August 2017, Scottish Widows agreed to delay a decision regarding the exercise of their termination rights for a period of six months "during which period the parties agreed to discuss in good faith ways to build a successful relationship and address the competition issue".
Antonio Lorenzo, chief executive of Scottish Widows and Group Director of Insurance & Wealth, said: "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.
"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."
The group added there are no immediate changes for customers and it anticipates implementing the new arrangements by the end of H1 2019. Scottish Widows and Wealth will work with Standard Life Aberdeen to ensure no disruption to performance or service in the interim.
Commenting on the news, Laith Khalaf, senior analyst at Hargreaves Lansdown said: "This is a blow for Standard Life Aberdeen, but has been on the cards ever since the merger. Standard Life and Scottish Widows are long-standing rivals, and the prospect of one group managing the fund range of the other was never going to sit entirely comfortably in the corridors of power in Edinburgh.
"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 is 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.
"Lloyds and Scottish Widows now have 12 months to find a new home for this money. You might think that with £109bn of assets on offer this might be an easy task, but these funds have to be managed at relatively low cost with enough margin for both the investment manager and Lloyds to make a turn. They will also find the field of suitors may be limited by the fact that some of the candidates come with the same baggage as Standard Life Aberdeen, namely a presence in the workplace pensions market.
"There is a possibility Standard Life Aberdeen may retain this chunk of assets, subject to further negotiations. There's also an outside chance Lloyds may look to rebuild its own investment management capabilities, as it launches a new three-year strategy next week. This would make some sense now the bank has recovered from the financial crisis and will be looking for opportunities to grow and diversify. However, 12 months doesn't give the bank a great deal of time to pull off such a big u-turn, having sold SWIP to Aberdeen only a few years ago, so this doesn't look like a serious prospect for the time being."
Henry Croft, research analyst at Accendo Markets, added: "Shares in Standard Life Aberdeen are sharply lower this morning after Lloyds Banking Group announced it would terminate a contract with the asset manager held with its Scottish Widows business.
"Management at the UK's largest asset manager have been quick to reassure that Lloyds' decision to withdraw around 17% of the company's £646bn AUM (previously a third of Aberdeen's assets) would not have a material impact, however some shareholders disagreed, seeing shares fall as much as 10% after the open.
"Some relief will come from the knowledge that Lloyds' funds only amounted to 5% of total group revenues due to the lower margin returns in comparison with the majority of assets. However, losing a further £109bn having been crowned the worst-selling European-headquartered asset manager in the first nine months of 2017 isn't exactly a vote of confidence in what was supposed to be a dynamic merger for the UK fund management industry.
"The challenge now facing Standard Life Aberdeen is to plug the hole left by Lloyds' departure, while the latter will seemingly now look to reinvest part or all of Scottish Widows' funds without delay in order to avoid a protracted period with their funds in cash, especially given significant pressure on UK pensions with a growing elderly population."
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