Why UK bank M&A is still stuck in the doldrums

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When Cooperative Bank last bid on TSB, Cooperative Bank had not yet found a £ 1.5 billion capital black hole on its balance sheet. The chair at that time had a drug problem, And that it would have to be Relieved by bondholders..

This was paid for a planned acquisition in 2013. The co-operative bank was simply inspired by TSB owner Banco Sabadell. Spanish lenders say it is not interested in selling.

This shows that the co-operative bank is ready to bid on anyone. However, the fact that TSB courtship began again eight years after the failure to buy a bank from Lloyds shows how less competition was in British High Street banking at the time. Analysts continue to anticipate integration. It doesn’t keep happening.

In 2013, Lloyds was forced to spin out the TSB to solve the state aid problem that resulted from the acquisition of HBOS during times of crisis. Selling 600 branches with the TSB brand was designed to create a new “challenge” bank.

However, there were concerns about how to put a burden on the new bank to compete with incumbents on the main street. In its 2011 report, the Independent Committee on Banks said: [TSB] Maintaining its current size will bring it back to the range of small banks that have never exercised strong competitive constraints in the past. ”

When ICB wrote the report, TSB had a 4.6% share of the individual’s current account market. This is “on the border of subscale banks that haven’t grown significantly in the past,” ICB said.

In 2020, it had a 4.3% share. ICB’s fears in that regard would seem to have come true. It also proves difficult for customers to get rid of the largest banks, despite competitive initiatives to drive account switching and the rise of digital-first competitors.

If the challenger simply lacks the scale to compete, combining should be an obvious solution. Still, they aren’t gathering, except for trading with Virgin Money.

Not only did Sabadell reject the co-operative bank, but Sainsbury’s discontinued speculation of a sale to the bank on Friday. Entertaining the offer, it concluded that “these do not provide better value to shareholders than is achieved by holding Sainsbury’s Bank.” Co-operative banks received their own takeover approach last year from private equity firm Cerberus. It didn’t go anywhere either.

Integration can occur. The need to reduce the ratio of economies of scale to cost to income means that it should happen. But that doesn’t seem to be the case yet.

Sabadell’s and Sainsbury’s refusals show a valuation gap between what sellers consider their assets worthwhile and what buyers are willing to pay. Part of the question is where we are in the interest rate cycle. We are preparing for the first rise in a few years. Persistently low interest rates make it difficult for any bank to make money. As a result, they made difficult decisions, hacked branch networks, repeated redundancy, and moved online.

These cost-cutting measures are just beginning to pay off. The list of turnaround stories in the UK midmarket is long and covers almost every non-professional bank there. Profit has just reappeared in Virgin Money, TSB, and Co-op Bank.

This will enable painless transactions again. It also makes it difficult to price bids. Cooperative banks are reported to have provided TSB with over £ 1 billion. This is about 0.6 times the current tangible book value, Jeffreys analysts estimate. But across the sector, valuations have risen from 0.7x to nearly 0.9x. Sabadell paid TSB £ 1.7 billion in 2015. As long as Spain continues to address the issue of domestic profitability and TSB’s performance continues to improve, the wait-and-see approach makes sense for Sabadell.

But in the end, TSB and other mid-sized banks are still subscale. After the pandemic has forced everyone to improve their online services, they are facing more effective competition with major banks. Challengers can’t afford another eight years without them taking action together.

Why UK bank M&A is still stuck in the doldrums Source link Why UK bank M&A is still stuck in the doldrums

The post Why UK bank M&A is still stuck in the doldrums appeared first on California News Times.

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