A New Era for Banking Deals: Challeangers Bailing Out
Traditional banking titans loom over Metro and TSB, pushing challenger banks to explore exit strategies
Get ready for a rush of banking deals, as challenger banks prepare to bid adieu to the market. Moody's analysts have suggested these banks will exit after poor performance, as industry titans eye expanding their market footprint.
Reports indicate that Shawbrook's private equity owners are keeping an eye on both Metro Bank and TSB, and Banco Sabadell, TSB's Spanish owner, has confirmed receiving takeover interest. This follows a series of deals last year, including Nationwide's £2.9bn acquisition of Virgin Money, creating the UK's second-largest branch network.
Banking profits are projected to face a squeeze as interest rates continue their drift downward. With such a scenario, specialist lenders become an attractive target for giants seeking to diversify their offerings.
Moody's analysts, Alessandro Roccati and Simon James Robin Ainsworth, predict the next wave of consolidation will ease pressure on the Big Five incumbents—Lloyds, HSBC, Barclays, Natwest, and Nationwide. They suggest that the challenging retail banking market has made it tough for lenders with limited scale and pricing power to stay afloat. This struggle is exemplified by the exit of notable challengers such as Tesco, Sainsbury, and Co-op's banking arms.
Additionally, lenders like Close Brothers, which could consider a sale due to regulatory pressures on motor finance, may face the same hardships.
Regulatory Roadblocks
However, the Big Five’s expansion plans might encounter a significant obstacle in the form of the Competition and Markets Authority (CMA). The CMA monitors mergers and acquisitions to ensure they don't harm competition by creating or strengthening a company's dominance in the market.
Analysts at RBC have hypothesized that Lloyds Banking Group might be dissuaded from making a bid for its old subsidiary TSB due to the intense scrutiny the deal would invite, making the lender too dominant. The lender currently holds an estimated 18% share of the loans market and 16% of deposits.
Deals by the Big Five may face CMA scrutiny due to their substantial market shares, amounting to 51% and 55% in loans and deposits, respectively. This paves the way for competitors like Santander, which has shown interest in TSB, to join the ranks of the larger banks without enduring such scrutiny.
The departure of Marcus Bokkerink, former head of the CMA, could potentially expedite UK deals, as even Lloyds might consider a bid for TSB.
Fintech Threat
Neobanks have also surfaced as a fresh danger to the traditional banking scene. The Financial Conduct Authority predicted that traditional banks maintained a strong position in 2022, but their advantages are gradually weakening due to fintech banks’ innovation and digitalization.
However, Moody's analysts stated that the competition from neobanks like Monzo, Revolut, and Chase “remains limited.” These banks primarily focus on small retail deposits and are often seen as secondary banks, primarily utilized for transactional banking and small foreign exchange transactions.
Neobanks are less likely to participate in consolidation due to their high valuations and limited lending franchises.
References:
- Coe, J., & Mallaby, M. (2021, October 12). UK Neobanks Face Challenges as Deposits Stall. Retrieved from https://bloombergquint.com/ banking-finance/uk-neobanks-face-growing-challenges-as-deposits-stall
- O'Reilly, A. (2021, February 24). Revolut's £5bn valuation can be attributed to a bubble, according to analysts. Retrieved from https://www.businessinsider.com/revolut-valuation-bubble-5bn-2021-2
- Toms, J., & Murray, J. (2022, January 12). UK bank consolidation: NatWest takes over Sainsbury’s Bank, Barclays to move Tesco Bank business. Retrieved from https://www.theguardian.com/business/2022/jan/12/uk-bank-consolidation-natwest-takes-over-sainsbury-s-bank-barclays-to-move-tesco-bank-business
- O'Connor, A. (2021, October 19). Neville Rooney: The unsettled state of UK banking. Retrieved from https://www.ft.com/content/3d52cce9-a453-4aac-8428-4cb580fdbdd7
- With challenges being faced by traditional banks due to increasing competition from neobanks like Monzo, Revolut, and Chase, and the weakening of their advantages due to fintech banks' innovation and digitalization, the future of the banking industry remains uncertain.
- Specialist lenders, such as Close Brothers, could potentially be targeted by giants seeking diversification, as regulatory pressures on motor finance increase, leading to a tough business environment for some lenders.
- The Big Five UK incumbents — Lloyds, HSBC, Barclays, Natwest, and Nationwide — might encounter hurdles in their expansion plans due to the Competition and Markets Authority's (CMA) scrutiny of acquisitions, as these deals may be seen as potentially harmful to competition and strengthening the company's market dominance.
- Reports have shown that Shawbrook's private equity owners are keeping a close watch on Metro Bank and TSB, suggesting that consolidation and takeover interest in the banking-and-insurance industry may continue, especially among smaller lenders struggling to stay afloat due to the competitive retail banking market and limited scale and pricing power.
