Financials Unshackled Issue 50 | Metro Bank In Play? / BARC, LLOY & STAN @ GS Financials Conference / Irish CBI Financial Stability Review
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Welcome to Financials Unshackled Issue 50! Just for this week the issue follows a different format where I focus on just three key developments (as set out below) and provide a calendar for the week ahead.
Metro Bank in play? Some thoughts
UK banks (LLOY, NWG, STAN) at GS European Financials Conference - key highlights
Central Bank of Ireland Financial Stability Report - no changes in capital requirements
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Select Key Developments Review
Metro Bank in play? Some thoughts
Sky News reported here on Saturday morning that Pollen Street Capital, the financial services-focused private equity firm which owns a near-50% shareholding in Shawbrook Bank (alongside BC Partners) through the Marlin Bidco vehicle, approached Metro Bank (MTRO) about a possible take-private deal in the last fortnight. There is no further fresh information in the article.
At the outset it is worth noting that if Pollen Street were to acquire MTRO it is not entirely clear that it would be merged with Shawbrook but it seems quite likely that it would. It was interesting to note that the news report specified that the approach to MTRO was made by Pollen Street and it is not clear whether BC Partners would also ‘stump up’ in the event of any combination with MTRO - we just don’t know. As an aside, it is also worth noting that Pollen Street also has an investment in Tandem Bank, a green-focused UK digital challenger bank which could also feature in the thinking to the extent that Shawbrook were to merge with another entity.
It has been well-documented in the media that there is a desire on the part of Shawbrook’s owners to achieve a liquidity event - whether that be through a trade sale or an IPO. The most recent news in this context was a report in Financial News on 7th April noting that Shawbrook’s owners have decided to delay IPO plans for the bank in the wake of tariff turbulence - which followed a Sky News report on 4th January noting that Shawbrook’s owners were eyeing up an IPO for potentially as soon as 1H25. Of course, the challenge that mid-tier lenders like Shawbrook have in pursuing an equity market listing is the multiple of book value that investors are prepared to pay - thinking back to when Charter Court Financial Services (which was acquired by OSB Group in 2019) was marketing its own IPO back in 2017, the view in the City was that ‘it needs to come at a material discount to OSB’.
Subsequent to the aforementioned Financial News report, Sky News reported on 23rd April that Shawbrook made a tentative “highly preliminary” approach to Starling Bank in relation to a potential £5bn merger - and while no live discussions are reported to be taking place, the article noted that “the door has been left ajar for Shawbrook to return with a formal offer”. However, the article also noted that “Many Starling investors believe the company is worth at least £3bn and would prefer to hold out for a higher valuation as its technology platform, Engine, continues to grow” (for context, Engine delivered £8.7m of revenues in the last financial year). This, together, with this weekend’s news report, could suggest that Shawbrook’s owners are keen to enhance the potential attractiveness (and relative valuation) of the bank to elicit a higher multiple at IPO (or, indeed, to potentially open up other options - for example, a larger combined entity delivering super-sized returns could be a more likely target for a larger player). Indeed, it’s clearly not the first time Shawbrook’s owners have considered M&A options for the bank - it has been widely reported that Shawbrook bid for Co-Op Bank and considered a bid for MTRO in 2023.
Furthermore to the extent that discussions have ceased for now with Starling Bank’s owners (which, to be clear, they may not have) then a fresh approach for MTRO could give Starling’s shareholders some pause for thought in relation to their own valuation expectations - but, that being said, there is clear industrial logic in a combination of Shawbrook and MTRO so please don’t read this as a suggestion that this development might just be a ruse to get Starling’s owners to contemplate a refreshed valuation assessment.
Going back to the aforementioned 4th January news report, the article stated that Shawbrook’s owners were reportedly set to seek an equity valuation of >£2bn for the business in an IPO - that is >1.50x end-FY24 tangible book value. Despite Shawbrook churning out high-teens returns on tangible equity (u/l RoTE was 16.7% in FY24, for example), the readacross from where UK listed specialist peer banks are currently trading relative to their RoTEs suggests that securing a valuation in this territory could be out of reach. Indeed, Shawbrook’s owners might acknowledge this. Lots of ifs and buts here but it may indeed mean, as noted above, that Shawbrook’s owners have decided to just focus instead on seeking out value-enhancing mechanisms that would make the business more attractive from a listing perspective - and both Starling and Metro Bank have one key common ingredient that could be transformational in a returns context for Shawbrook, i.e., current accounts.
Metro Bank is currently trading at 0.71x tangible book value and, following its return to profitability in 4Q24 (3Q24 on an u/l basis) management’s self-declared “bold” guidance for RoTE is: i) mid to upper single digit in FY25; ii) double-digit for FY26; and iii) mid-to-upper teens from FY27. Given that MTRO is trading at 0.71x last reported (end-FY24) tangible book value, it’s clear, given current profitability levels, that the market is clearly factoring in significant future earnings upside - which is not necessarily unusual in turnaround situations (and, to the extent that MTRO delivers on its commercial lending ambitions within acceptable risk parameters and the rate outlook does not change materially one can see how they will deliver). But how much of a premium would Pollen Street be willing to pay to the current stock price given this? And another possible issue is a potential downward revaluation of MTRO’s property assets (over £700m at end-FY24, including £160m of right-of-use assets) at acquisition. Then, from a MTRO perspective, the majority (53%) shareholder Jaime Gilinski Bacal (via his Spaldy Investments vehicle) has already booked a substantial paper gain on his investment in MTRO - having acquired the lion’s share of his interest in the bank at a price of 30p per share in the 2023 capital raise (MTRO stock closed at 112.2p on Friday) - and may be keen to realise gains without undue delay. Indeed, one could argue that, as well as acting as a motivational force, management’s recently struck incentive package served to signpost to potential bidders a deep conviction on the part of key shareholders as well as management in the returns upsizing story. However, Gilinski Bacal may be playing for a lot more - and key executives, who might be resistant to doing a deal prematurely given the guided RoTE path (especially when you think out to FY27 and beyond), might influence the key shareholder’s thinking too.
Let’s see what the coming weeks bring in terms of newsflow, if any. Seeking out opportunities to bolster the returns profile of Shawbrook (which I am assuming is what the reported Pollen Street approach to MTRO is fundamentally about) is sensible and could be transformative from a returns perspective for the bank. However, like in any M&A situation, Shawbrook’s owners will surely be keen to only pay a price that will facilitate strong future upside capture for their own account.
UK banks (LLOY, NWG, STAN) at GS European Financials Conference
Lloyds Banking Group (LLOY), NatWest Group (NWG), and Standard Chartered (STAN) broadcast their fireside chats at the Goldman Sachs European Financials Conference in Berlin on Thursday 12th June and I dialled into the sessions. In overall terms, the messaging was upbeat and consistent with the tone of recent updates, i.e., solid UK macro, confidence in revenue guidance, no alarm bells ringing in a costs context, strong asset quality, and continued commitment to return capital to shareholders via buybacks albeit selective appetite for M&A too. Some key highlights from each of the sessions are set out below - please note that the predominant focus is on LLOY and NWG as STAN is not a name I have tracked especially closely historically given its EM / Asia focus.
LLOY CFO - Some key highlights
Macro is solid (GDP has been tracking ahead of expectations albeit there was a softer-than-expected GDP print that morning, employment a bit weaker, inflation slightly stronger) and activity levels are fine though not stellar - which is all reflected in guidance.
Reiterated commitment to delivering on the 2024-26 strategic plan - good progress but lots still to do.
Retail lending growth strong in 1Q; some pull-forward of mortgage lending in 1Q due to stamp duty changes but still see growth (albeit slower) in 2Q.
Commercial lending book (which has seen negative growth due to roll-off of Covid-era government-backed loans) now starting to inflect and will start to stabilise.
Further growth in deposit volumes expected in 2Q - Retail growth will be slower than in 1Q with, potentially, more of the growth to come from Commercial in 2Q.
Net interest margin (NIM) will grow every quarter but it won’t be linear - noting that the uptick in 2Q will be slightly less than the 6ps of accretion seen in 1Q. “Feeling pretty good” about FY25 Net interest income (NII) guidance.
Expect continued strong quarterly growth in Other Operating Income (OOI) but it will ebb and flow a bit q/q - but lots of confidence in OOI trajectory overall and remain committed to the strategy to diversify from interest revenue dependence.
No cause for alarm on costs and confidence in FY25 guidance reiterated.
Asset quality “pretty good”. Retail book quality has been stable to improving in 2Q (new to arrears are stable to down; down in mortgages) while commercial book quality is strong albeit with some isolated challenging cases. Expect to integrate £100m tariff booked in 1Q as previously guided - and noted expectations for some release of this charge too.
NWG CEO - Some key highlights
Expects lending volume growth to remain supportive of revenue delivery (notably, guidance factors in two further rate cuts) and expect to continue to grow all three divisional loan books (noting again that NWG’s market share in mortgages and credit cards, for example, is below their natural share given primary banking relationships). 90% of FY25 structural hedge income will be locked in by the end of June and Sainsbury’s Bank acquisition, which completed in May, is supportive. Noted that 1Q tends to be a seasonal high in an Other Operating Income (OOI) context so the outturn shouldn’t be seen as a run rate - and, more broadly, he emphasised the importance of growing OOI with optimism around opportunities in Wealth particularly given that NWG ‘punches below its weight’ here. In overall terms Thwaite noted that he ‘feels good’ on income momentum / trajectory.
Very confident in delivering on FY25 costs guidance and pleased with the work on driving multi-year efficiencies.
Very confident in delivering cost of risk (CoR) of <20bps for FY25 (embedding 2bps from Sainsbury’s Bank acquisition), supported by strong credit performance across all books - and seeing no change in that respect.
Keen to become more active in a balance sheet management context as previously noted.
Confident in ability to effectively execute and integrate M&A opportunities based on recent experiences - but any acquisition target would need to be highly financially compelling in comparison to the alternative of reinvesting in the business or returning capital to shareholders (with Thwaite noting that buybacks still make sense at the current share price). The operational bar is also high.
STAN CFO - Some key highlights
CIB business benefiting strongly from unprecedented levels of activity in this geopolitical backdrop - and capturing very powerful ‘network effects’. Markets business going very strongly given level of flow business; Banking strong too but may see a slowdown in the pipeline (though not seeing that at the moment); Wealth seeing some more defensiveness on the part of Affluent customers.
Net interest income (NII) will be difficult to grow in FY25 due to average rate changes and less capability to manage passthrough rates as official rates decline. Watching latest HIBOR developments closely. Continues to expect revenue guidance to manifest.
Phasing of spend to deliver on Fit for Growth plan targeted savings is far from linear; revenue diversification facilitates nimbleness in an investment spend context.
No ‘flashing hotpoints’ in a CIB impairments context but not expecting to see net releases going forward. Migration of business towards servicing Affluent Wealth customers is positive for cost of risk (CoR).
Remain committed to capital returns target. In terms of the capital allocation hierarchy, it’s: i) invest what is needed to achieve a growth bank with strong and improving profitability; ii) M&A - now an option given the rerating in the share price (with P/TBV close to 1x versus 0.5x in the past); and iii) return it to shareholders. Was keen to point out that the 13-14% target CET1 capital ratio range is dynamic and that STAN doesn’t have a specific target within it.
Central Bank of Ireland Financial Stability Report - no changes in capital requirements
The Central Bank of Ireland published its biannual Financial Stability Report 2025 I on Wednesday 11th June (press release here with links to the various documents). The CBI is maintaining the Countercyclical capital buffer (CCyB) on Irish exposures at 1.5%, a rate which it considers to be appropriate when cyclical risk conditions are neither elevated nor subdued. The CBI does note that “While activity in the economy has to date remained robust, albeit with pockets of weaker dynamics, potential changes in the international trade and investment environment may have a considerable impact on the Irish economy in the future” - so, the CCyB could indeed be altered at the stage of the next review in December if developments warrant that. Indeed, the CBI notes that “Having the CCyB rate set at 1.5 per cent allows for its partial or full release, should a materialisation of risk warrant it. In the other direction, if cyclical risks (reflected in indicators across credit, the economy and asset prices) were deemed to be becoming elevated, the CCyB rate could be increased to support the resilience of the banking sector and economy.”.
However, it was also interesting to read that the CBI carried out an assessment using its macroprudential stress test methodology, to understand the potential scale of losses on Irish exposures for the domestic banking sector associated with a hypothetical adverse movement in key macroeconomic variables - and noted that “While there is no direct mechanical link between the estimated capital depletion from this analysis and the CCyB rate, the exercise provides additional support in reaching a judgement that the CCyB rate remains at an appropriate level”.
W/C 16th Jun Calendar
Wed 18th Jun (07:00 BST): S&U (SUS) 1Q25 Trading Update
Wed 18th Jun (12:00 BST): S&U (SUS) AGM
Wed 18th Jun (morning): UK Finance Interest Only Mortgages Update
Thu 19th Jun (12:00 BST): Bank of England (BoE) Monetary Policy Summary & Monetary Policy Committee (MPC) Meeting Minutes
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