Challenger banks scout exit routes as giants circle Metro and TSB
Analysts are pencilling in a fresh wave of banking deals with challenger banks set for a market departure.
Moody’s analysts have said challenger banks will “seek exit after weak performance” as industry juggernauts set their sights on ramping up their market share.
Takeover talk has gripped the City after reports Shawbrook’s private equity owners were eyeing Metro Bank and TSB’s Spanish owner confirmed it had been approached with takeover interest.
This follows a fleet of deals last year including Nationwide’s blockbuster acquisition of Virgin Money for £2.9bn.
The tie-up created the UK’s second-largest branch network as Nationwide diversified its offerings away from interest-rate-sensitive savings and mortgages.
Banking profits are expected to face a squeeze as interest rates continue their gradual fall making specialist lenders a prime target for giants to further diversify their offering.
Moody’s analysts Alessandro Roccati and Simon James Robin Ainsworth said the next wave of challenger bank consolidation would “reduce competitive pressure on the Big Five incumbents” – which refer to Lloyds, HSBC, Barclays, Natwest and Nationwide.
Roccati and Ainsworth said the recent departures of challenger banks, which include the likes of Tesco, Sainsbury and Co-op’s banking arms, signaled “how difficult it is for lenders with limited scale and pricing power to operate sustainably in the UK retail banking market.”
They added this “lack of scale and weak profitability” provided headwinds for mid-tier competitors, including the likes of Close Brothers which may opt to a sale after regulatory pressures from motor finance.
The regulation roadblock
But the Big Five’s ambitious scaling plans may face a detrimental roadblock in the Competition and Markets Authority (CMA).
The watchdog monitors mergers and acquisitions to ensure they don’t harm competition by creating or strengthening a company’s dominant market position.
Analysts at RBC had speculated Lloyds Banking Group may be forced to steer away from a bid for its old subsidiary TSB, due to scrutiny the deal would make it too dominant.
The lender has an estimated 18 per share in the loans market and 16 per cent in deposits.
Roccati and Ainsworth said deals by the Big Five may face CMA scrutiny, due to the banks holding market shares of 51 per cent and 55 per cent in loans and deposits.
This invited the opportunity for the likes of Santander, which has expressed interest in TSB, to join the ranks of the larger banks without its deals facing scrutiny.
But analysts noted the ousting of Marcus Bokkerink, former head of the CMA, could “help facilitate UK deals, meaning that even Lloyds could kick the tyres on TSB.”
Fintech threat
Neobanks added a fresh threat to the banking scene challenging the legacy giants.
The Financial Conduct Authority said in 2022 that traditional banks maintained a strong position but historical advantages were “starting to weaken” due to the innovation and digitalisation of fintech banks.
But Moody’s analysts said the competition from the likes of Monzo, Revolut and Chase “remains limited”.
“These banks focus on small retail deposits, and often function as the customer’s second bank, used primarily for transactional banking and small forex transactions,” they said.
Roccati and Ainsworth said neobanks were “less likely to take part” in the consolidation due to their “high valuations and limited lending franchises”.