Lawmakers are encouraging the growth of lenders such as Branson-backed Virgin Money Holdings (U.K.) Plc (VM/) to challenge the dominance of Royal Bank of Scotland Group Plc, HSBC Holdings Plc (HSBA), Lloyds Banking Group Plc and Barclays Plc. (BARC) The smaller “challenger” banks may have no choice other than to merge with each other if they hope to compete against these four, which control as much as 80 percent of the market.
“Consolidation in the medium term is inevitable,” Warren Mead, head of challenger banking and alternative finance at KPMG LLP, said in a phone interview. “They don’t have sufficient scale on their own to be effective challengers.”
The need to gain scale could drive Virgin Money together with TSB Banking Group Plc (TSB), the consumer lender carved out of Lloyds in June, according to
Gary Greenwood, an analyst at Shore Capital Group Ltd. The two are valued at about $2 billion each. Smaller challenger banks such as Shawbrook Bank Ltd. also may be targets, Greenwood said. A merger between TSB and customer-owned Co-Operative Bank Plc makes sense as well, according to Investec Ltd.
“U.K. banking continues to be an oligopoly,” Jayne-Anne Gadhia, chief executive officer of Virgin Money, said in a phone interview. “It’s important to give customers the best possible deal to make sure that oligopoly is changed.”
Virgin Money was little changed at 285 pence at 11:54 a.m. in London. TSB was little changed at 264.6 pence.
Challengers’ Challenge
Virgin Money, based in Newcastle upon Tyne, England, is among U.K. lenders from TSB to OneSavings Bank Plc (OSB) that have sold shares this year in initial public offerings. Gadhia said consolidation is “not something we’re thinking about at the moment,” and if it happens in the future “we’ll see what that means.”Seven challenger banks, including TSB, Virgin Money and Williams & Glyn, had combined deposits of 76.1 billion pounds and 71.6 billion pounds ($112 billion) of loans at the end of last year, according to company filings. That’s a fraction of total U.K. deposits and loans, which stood at 1.7 trillion pounds and 1.8 trillion pounds, respectively, according to figures compiled by the Bank of England.
“Lloyds are spending one billion pounds on a digital strategy. The challengers can’t afford to do that at the scale they have,” said KPMG’s Mead. “The way in which they go to market and interact with customers will take a massive level of expenditure to be able to compete.”
Size Matters
Lawmakers are pushing for challenger banks to grow their market share of personal current accounts in the U.K., seeing it as a yardstick for measuring competition. Banks with a checking account market share of below 5 percent failed to grow significantly in the past, according to the Independent Commission on Banking, a parliamentary-appointed review led by John Vickers into financial stability in the U.K.TSB is among the stronger challenger banks, with 4.2 percent of the U.K.’s checking-account market. Yet Andrew Tyrie, the chairman of Parliament’s Treasury Committee, questioned Oct. 23 whether it could grab enough market share to successfully compete against its bigger rivals.
“There is a risk that a bank of this size might struggle to grow significantly and to act as a true challenger,” said Tyrie, who estimated the lender needed to gain at least 6 percent of the market.
Still Growing
TSB CEO Paul Pester said in an e-mailed statement Nov. 20 that the bank plans to increase its market share above 6 percent and continues to grow “well ahead of our strategy.” A representative for the bank declined to comment last week on whether the lender would consider mergers and acquisitions.TSB could look to buy smaller banks as a way to increase its reach because it has excess capital, said Ian Gordon, an analyst at Investec in London.
“A combination in order to deploy surplus capital to achieve scale economies all points to the benefits of consolidation,” he said in a phone interview.
TSB has a common equity Tier 1 capital ratio, a measure of financial strength, of 18.8 percent compared to 12 percent at Lloyds.
A merger with Co-Operative Bank could also “make sense” because Lloyds had previously held talks to sell TSB to the customer-owned lender, Gordon added. A representative for Manchester, England-based Co-Operative Bank declined to comment.
Bigger Deal
A bigger move would be a merger between TSB and Virgin Money.“Virgin doesn’t really have a physical network,” said Greenwood at Shore Capital in Liverpool, England. “You can see the logic of putting them together if Virgin felt it needed physical distribution.”
While both banks have similar market values, with roughly the same amount of deposits and loans, TSB has more branches: 631 with 30 more planned, compared with 75 for Virgin Money.
Virgin Money may still be in a stronger position than some other lenders in a period of consolidation, sharing a well-known brand that stretches from air travel to soft drinks.
Among smaller possible targets is Shawbrook Bank, a challenger bank that has yet to sell shares to the public, Shore Capital’s Greenwood said.
“It would be easiest to bite,” he said. “That’s on the basis it’s easier to buy something small than it is to buy something big.”
Fiona Cornes, a spokeswoman for Shawbrook Bank, said the bank is “focusing on our controlled yet prudent growth,” declining to comment specifically on possible deals.
Attracting Customers
Labour Party leader Ed Miliband has said he wants to create two new challenger banks with about 12 percent of the U.K. current account market if he becomes prime minister after an election in May.Even so, breaking the grip of Britain’s biggest banks won’t be easy. A new account-switching service, designed to make it easier for customers to change banks, was introduced a year ago, though relatively few people have taken advantage of it. Some 1.2 million people changed banks in the 12 months through September, according to the Payments Council, which administers the service. That’s out of a total of more than 80 million U.K. accounts.
“Many retail customers still feel much more comfortable with a large traditional bank because of the perceived state backing of the bank and concerns, however unfounded they might be, over the position of smaller challenger banks,” said Gavin Weir, a partner advising on mergers and acquisitions at White & Case LLP.
Disruptive Strategies
Merging small banks may not be the best way to encourage competition, according to Joe Dickerson, an analyst at Jefferies Group LLC in London. Instead, the smaller lenders can gain share by pursuing the “street-corner to street-corner strategies” they’ve been employing, he said.Metro Bank PLC, a London-based bank, keeps its branches open seven days a week and offers customers free coin counting and treats for dogs.
Those types of strategies “can have a very disruptive effect,” Dickerson said.
No comments:
Post a Comment