Valuations, scale and diversification drive UK bank acquisitions – Fitch

NatWest Group’s agreement to take over most of Sainsbury’s banking business is the latest sign of increased consolidation in the UK banking sector this year, driven by lower valuations and a drive for scale and diversification, Fitch Ratings said.

In its commentary, Fitch stated that the transaction announced on June 20 is the fourth acquisition of the medium-sized banking sector announced this year and includes assets with a total value of GBP 130 billion.

Explaining further, the global rating agency said the justification for acquisitions is typically increased scale, particularly in lower margin businesses such as mortgage lending, and diversification into unsecured consumer lending.

He noted that consumers have de-leveraged significantly during the pandemic, but that trend is reversing and consumer lending could help offset pent-up demand for mortgages. It could also help improve banks’ profitability.

Some of the acquisitions provide higher lending margins, and acquired banks offering low-cost current account franchises also provide financing diversification and attractive deposit margins, Fitch added.

“We believe lower valuations for UK banks have encouraged increased consolidation activity. Further opportunistic or strategic acquisitions may occur unless macroeconomic conditions deteriorate significantly.

“We expect that any further transactions will primarily involve loan portfolios, non-lending companies or wealth management assets. “Several banks may want to strengthen their systemic capabilities and market position 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, IT systems integration has resulted in significant costs and increased risks for several previous UK bank integrations. The latest transactions concerned the acquisition of banks offering consumer loans, mortgage loans for residential purposes and retail deposits.

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