Valuations, Scale, Diversification Driving UK Bank Acquisitions –Fitch
NatWest Group’s agreement to acquire most of Sainsbury’s banking arm is the latest sign of increased UK banking sector consolidation this year, which has been driven by lower valuations and the pursuit of scale and diversification, Fitch Ratings says.
In its commentary, Fitch said that the deal, announced on 20 June, is the fourth mid-sized banking sector acquisition announced this year, and takes the total to GBP130 billion of assets.
Explaining further, the global rating agency said the rationale for the acquisitions has typically included increased scale, particularly for lower-margin business such as mortgage lending, and diversification into unsecured consumer lending.
It noted that consumers deleveraged significantly during the pandemic but this trend is reversing, and consumer lending could help to offset subdued demand for mortgage loans. It could also help to improve the banks’ profitability.
Some of the acquisitions bring business with higher lending margins, while acquired banks with low-cost current account franchises also bring funding diversification and attractive deposit margins, Fitch added.
“We believe lower valuations across UK banks have encouraged the increased consolidation activity. Further opportunistic or strategic acquisitions could follow, barring a severe setback to macroeconomic conditions.
“We expect any further deals to primarily involve loan portfolios, non-lending businesses, or wealth-management assets. Several banks may be looking to strengthen their systems capabilities and market positions in these segments”.
When assessing the credit impact of bank acquisitions, Fitch considers the likely financial profile of the combined entities, as well as the integration and execution risks associated with the acquisition.
In particular, the integration of IT systems has resulted in substantial costs and increased risks in several previous UK bank integrations. Most recent deals have been acquisitions of banks with consumer lending, residential mortgages and retail deposits.
UK retail banking is more fragmented than commercial banking, which is dominated by large banks with very high market shares and limited competition from smaller banks. Bitcoin Declines to $61,000 over Retail Selloffs
