UK bank M&A will happen surely but slowly
BREAKINGVIEWS-UK bank M&A will happen surely but slowly The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Neil Unmack
LONDON, Nov 13 (Reuters Breakingviews) - The UK bank consolidation dance is starting again. The £1.3 billion Metro Bank MTRO.L has put itself up for sale, and could offer a rival like Shawbrook SHAW.L scale and cheap deposits. Partnering, however, brings headaches too.
Britain’s so-called challenger banks, such as Metro, Shawbrook, or Aldermore were supposed to break the dominance of the big high street players after the 2008 financial crisis. Yet years later, they are minnows next to the likes of NatWest NWG.L, or Lloyds Banking Group LLOY.L, which still dominate current account and mortgage lending.
That hasn’t stopped them being good investments, at the right time. Metro stood out from larger rivals by opening on Saturdays, encouraging customers to visit their branches and even offered drinking water to their dogs. But a capital shortfall in 2023 forced it to raise equity. Since then Metro’s share price has more than quintupled, handing a handsome gain to rescuer and 53%-owner Jaime Gilinski Bacal. Next year, the group is expected to crank out a respectable 15% return on tangible equity.
It seems a good time for Gilinski to take some chips off the table, which appears to be the impetus for the strategic review announced Thursday. The question is who will buy Metro. The idea it might be sold is hardly a state secret, and if bidders were queuing around the block, the bank would probably already be in talks.
Start with the big banks. It’s possible to make an investment case for a lender like, say Barclays BARC.L or even Lloyds. Metro has a robust and plentiful current account business, with a loan to deposit ratio of just 71%. That could prove particularly appealing at a time when banks are fighting for cheap funding. A deal could also offer savings, by removing overlapping costs and tech investment. Banco Santander SAN.MC targeted a whopping 50% of costs when it acquired TSB last year. That would imply at least £200 million of savings, worth in today’s money over £1 billion after taking off tax, and factoring in restructuring costs of, say, £300 million.
The snag is that Metro also comes with around 80 branches on long leases. Banks that have spent years retrenching from the high street and are now touting savings from AI may have little appetite for more bricks and mortar.
The more intriguing idea is that Metro could merge with another challenger. Shawbrook SHAW.L, a listed rival worth £1.4 billion, is reported to have eyed it in the past. Again, cheap funding could be the appeal: most challenger banks borrow through more expensive term deposits or wholesale markets. The flip side is that UK regulation disincentivises mergers, as bigger banks have to hold expensive loss absorbing debt, dubbed MREL, that would erode some of the upside.
Getting to a deal could also be tricky. Metro is relatively highly-valued, trading above its tangible book value. That could dull cheaper merger partners’ appetite for now. And Gilinski may not get an easy cash exit as most deals with challenger banks would probably involve shares. There may be other options. Britain’s building societies, effectively mutual lenders, have been keen acquirers, with Nationwide Building Society NBS.L buying Virgin Money in 2024. Or, a private equity group might buy a stake and bankroll Metro’s growth, or hunt for a deal.
While consolidation can be challenging, it will also become more critical in coming years. Falling rates may erode banks net interest income, and AI savings will make lending more competitive. Fintechs such as Revolut, meanwhile are gaining scale. For smaller players, life will become increasingly challenged.
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CONTEXT NEWS
Metro Bank on November 12 announced a strategic review, appointing Morgan Stanley to conduct a formal sale process.
Metro Bank shares rose 9.7% on November 12. They were down 1.2% on November 13 as of 0856 GMT, at 193.8 pence.
(Editing by Aimee Donnellan; Production by Streisand Neto)
((For previous columns by the author, Reuters customers can click on UNMACK/neil.unmack@thomsonreuters.com))