Analysis: Nationwide's Virgin swoop reignites UK banking takeover talk

Virgin Money UK

07/03/2024 17:09

(Adds Shawbrook declined to comment in paragraph 9)
    By Sinead Cruise and Tommy Wilkes
       LONDON, March 7 (Reuters) - Nationwide's 2.9 billion
pound ($3.7 billion) play for Virgin Money  VMUK.L  is fuelling
talk that Britain's biggest banks might pounce on smaller
lenders, heralding an M&A watershed as competition to lend
reaches new heights.
    The all-cash deal proposed by the 140-year-old
mutually-owned building society is potentially the biggest
British banking takeover since the 2008 global financial crisis.
    It is also a bold challenge to the dominance of Lloyds
Banking Group  LLOY.L , Barclays  BARC.L , HSBC  HSBA.L  and
NatWest  NWG.L , after efforts by mid-size and challenger banks
over the last decade to break their hold had little success.
    Nationwide's proposed takeover would create the
second-largest mortgage and savings provider in the UK with
close to 700 branches, just as most rivals rapidly downsize
in-person banking services.
    Growing costs and falling margins for smaller lenders like
Virgin - which joined forces with Clydesdale Bank in 2018 - have
made Britain's banking sector ripe for consolidation outside the
"Big Four".
    Coventry Building Society, another mutually-owned lender,
said in December it had entered exclusive talks to buy Co-op
Bank, another example of how smaller players are teaming up to
better their prospects. 
    Shawbrook, a specialist lender backed by private equity
groups BC Partners and Pollen Street, approached Starling Bank
about a deal last year but was rebuffed, two sources familiar
with the matter told Reuters. 
    Shawbrook also bid for Co-op and made failed approaches for
Metro Bank  MTRO.L , sources previously said.
    Shawbrook declined to comment. Starling did not immediately
respond to a request for comment. 
    "This might be the time for consolidation in the industry,"
said Douglas Grant, Managing Director of newly-licensed Conister
Bank, pointing to stock markets undervaluing banks and the
appeal for lenders to deploy spare capital on acquisitions.  
    The FTSE 350 banks index has risen by around 10% since the
end of 2022, compared with a 32% increase in the STOXX index of
euro zone banks  .SX7E .
    Morgan Stanley analysts highlighted the low valuations
across European banking "which a player with cash can leverage".
    Antitrust concerns have loomed over potential banking
takeovers in the UK, especially as regulators sought to
encourage newer entrants to promote competition and address "too
big to fail" fears following the financial crisis.
    But some analysts on Thursday said that Nationwide's
proposed deal implied a warmer welcome from regulators,
particularly if buyers can argue consolidation would enable them
to offer better services and products to consumers. 
    "This does feel like a significant shift...We had previously
assumed that regulators would not support the combination of
incumbent challenger banks given their objective of promoting
competition," analysts at KBW said.
    An enlarged Nationwide would have a combined market share in
mortgage lending of 15.7%, up from about 12%. Together with the
Big Four and Santander, the combined share would rise to 80%.
    Yet the UK mortgage market would remain highly competitive
and in other products such as unsecured loans, Nationwide would
have less than a 10% share, analysts at Peel Hunt noted.
    "From the perspective of the bigger banks, the opportunity
to acquire these mid-tier institutions gives them access to not
only customers, but also talent and tools which would take time
and investment to replicate," said Simon Kent, Global Head of
Financial Services at consultant Kearney.
    
    CHALLENGES
    Despite the strategic rationale, there remain many
impediments to potential deals, several banking sources said,
and a massive flurry of takeovers is not inevitable.
    Some banks have already moved to bulk up and are busy
integrating new acquisitions.
    Next week marks the first anniversary of HSBC's rescue of
the UK arm of failed Silicon Valley Bank  SIVB.UL , while
Barclays clinched a 700 million pound deal to buy the banking
operations of retailer Tesco  TSCO.L  last month.
    Some smaller banks are too niche to elicit interest and for
others, owners and managers are likely to want too high a price,
analysts say.
    OneSavingsBank  1SBB.L , Secure Trust Bank  STBS.L , Vanquis
 VANQ.L  and Metro may all appeal to possible bidders, KBW
analysts said, pointing to their relative valuations.
    Representatives for the four banks declined to comment. 
    Conister Bank's Grant said mid-tier banks hoping to acquire
their way to success should proceed with caution.
    "(British banks) need to specialise in the products they
sell, so Nationwide you think of mortgages, Shawbrook, you think
of SME lending," Grant said. "So gaining more market share in
your specialist market would make sense from a consolidation
perspective."


($1 = 0.7844 pounds)

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 (Additional reporting by Amanda Cooper and Pablo Mayo
Cerqueiro; Editing by Kirsten Donovan)
 ((sinead.cruise@thomsonreuters.com; 020 7513 5026; Reuters
Messaging: sinead.cruise.thomsonreuters.com@reuters.net))