Financials Unshackled Issue 54: UK Banking M&A - The Possibilities PLUS A Reprieve from MREL for MTRO? (Special Edition)
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This special edition of Financials Unshackled takes a fresh look at the competitive landscape in UK banking and considers what further M&A could unfold - taking account of strategic considerations from a bank / building society perspective to inform the potential possibilities that I call out.
There has been heightened interest in M&A activity in the context of the UK banking landscape. Mostly, the sense has been that ‘regulatory clarity’ around matters like ringfencing, the MREL regulations, the Leverage Ratio threshold, and Basel 3.1 implementation will pave the way for deals - with a view that banks have largely been in ‘wait and see’ mode. I am publishing this note this morning following the spate of announcements from both His Majesty’s Treasury (HMT) and the Bank of England (BoE) Prudential Regulation Authority (PRA) yesterday as well as the Chancellor’s and BoE Governor’s Mansion House speeches last evening, which have brought some further clarity - which may well provide stimulus for more dealflow to start to kick off now.
Appendix 1 also sets out my thoughts on yesterday’s BoE PRA Policy Statement on MREL, which, in my view (and consistent with the Consultation Paper last October), paves the way for MTRO to potentially move to a ‘transfer’ resolution strategy in time, which would obviate the need for the bank to raise MREL-eligible debt provided it is meeting minimum capital requirements (and with a pro forma end-1Q25 Tier 1 Capital ratio of 17.5% as well as £150m of Tier 2 paper in issue it is).
UK Banking Competitive Landscape
Let’s start with a graphic to demonstrate the UK banking system. This is not an exhaustive list of all players - and includes select building societies as well as banks. I have, rather simplistically, distilled the landscape into four quadrants, namely:
Mainstream retail / corporate lenders (the ‘Big 6’)
Mainstream challenger lenders
Digital lenders (mainstream & specialist)
Specialist lenders
Context: Distinguishing between mainstream and specialist lenders
It is important to distinguish between the mainstream and specialist lenders though the divide is sometimes nuanced - with some of the mainstream lenders also carrying out specialist lending activities and vice versa. By mainstream lenders I mean those who provide mainstream lending product like standard residential mortgages, unsecured personal loan product, SME and corporate loan product, etc. By specialist lenders I mean those who are most focused on the procurement of specialised / niche loan product like professional BTL mortgages, non-standard residential mortgages, development finance loans, small-scale asset finance, etc.
Why a mainstream lending proposition isn’t for everyone
In short, competition is fierce in mainstream lending markets - especially in standard residential mortgages, the largest lending segment by far. Rather than overly complicate here, let’s just stick with the standard residential mortgage product to illustrate why mainstream lending only works for certain players.
Standard residential mortgage spreads are thin - UK bank management teams have referenced front book spreads of c.70bps (and, while spreads ebb and flow quite a bit over short periods, Financials Unshackled Issue 53 noted here on 13th July that 2Y front book spreads have now fallen to 66bps with 5Y spreads down at just 54bps. Yet the product generates high risk-adjusted returns for the major players. Why so? Chiefly for three key reasons, being that the large banks and building societies that are most active in this space benefit from:
Low cost funding, with a large quantum of non-interest earning liabilities (i.e., current accounts) within their deposit mix so a decent product asset/liability spread is achievable.
Keen risk weights, wherein internal ratings-based (IRB) credit risk models are deployed to inform risk weights - based on historical probability of default (PD) and loss given default (LGD) experience rather than higher standardised ‘off-the-shelf’ risk weights. So, the typical risk weights on mortgage lending for those IRB-accredited portfolios are in the region of c.15% nowadays versus c.35% for portfolios that rely on standardised credit risk models. This essentially means that the large players benefit from materially lower capital requirements, thereby driving higher returns capability (i.e., average tangible equity, the denominator in the returns on tangible equity (RoTE) calculation, is proportionally lower relative to an IRB-accredited bank’s average total asset base than for banks who have to apply much higher standardised risk weights). Put simply, if Bank X risk weights its mortgages at 35% and Bank Y risk weights them at 15%, then, ceteris paribus, Bank X has to price at more than 2x the level that Bank Y is charging (i.e., 35/15) to earn an identical return.
Operating leverage, where costs can be spread over a larger scale. Most businesses in most industries benefit from scale economies and banking is no different. Spreading fixed and semi-variable costs over a larger asset base enhances returns, i.e., one can price more keenly than a smaller-scale peer for an identical return. This denotes more pricing power, i.e., an ability to price more keenly while returns remain within target parameters.
In short, the above factors explain why smaller mainstream players have often struggled to compete effectively with the larger players. A high profile example of a bank that struggled on all three counts (although it did benefit from a material quantum of low interest-bearing current accounts - just not to the same extent as its larger peers) is Metro Bank (MTRO). While I’ll save the case study for another note, MTRO’s inability to compete effectively with the mainstream players drove it to de-emphasise standard residential mortgage lending activity - which led it to dispose of mortgage portfolios to NatWest Group (NWG) and pivot towards higher-yielding (and higher risk) lending segments (most notably commercial lending) in a bid to start on a clear path towards double-digit returns for its shareholders. In the context of this note, the above factors are a key foundational underpin for some of the consolidation efforts we have seen so far.
M&A Stimulants
Pent-up expectations of emerging regulatory loosening…
Before we delve into the potential combinations / candidates by sub-segment of the UK banking market, it is worth noting that there have been pent-up expectations in the City that further M&A activity will manifest once more regulatory clarity emerges. We got some more clarity yesterday and the following are notable in this vein:
Ringfencing regime - with Treasury noting yesterday in its ‘Financial Services Growth and Competitiveness Strategy’ document here that its intention is to drive “meaningful reform of the ring-fencing regime as part of our plans to tailor UK capital requirements to focus on growth and release capital for productive investment in the UK”. Treasury is due to issue a report on a review of the ringfencing regime in early 2026. ‘Edinburgh Plus’ (or should I say ‘Leeds Plus’ now!)? (see KPMG note from June here).
MREL regulations - the PRA issued a Policy Statement yesterday here noting that it is raising the indicative Total Assets threshold for firms coming into scope to £25-40bn - better than the £20-30bn range it had proposed in its consultation of 15th October here but below the £40-50bn range that UK Finance lobbied for.
Leverage Ratio Framework - the PRA’s consultation CP2/25 here closed on 5th June so we await an update in due course. The PRA has proposed that the current retail deposits threshold be raised from £50bn to £70bn and there is some optimism that there could also be changes effected to the PRA’s Leverage Exposure Measure too.
…has had would-be acquirers / sellers in ‘wait and see’ mode
Indeed, that is just to mention a few of the actual / potential regulatory changes - not to speak of some clarity in due course in relation to the motor finance debacle (with the FCA set to confirm within six weeks of the Supreme Court’s decision if it is proposing a redress scheme and, if so, how it will progress that). It made sense to wait and see how the regulation evolves as some of the potential changes could have material implications. Indeed, many have argued that Sabadell’s decision to sell TSB might not have come as fast as it did if it had it not been under ‘timetable pressures’ in the context of BBVA’s hostile pursuit of Sabadell, though, that being said, the price achieved of 1.45x end-1Q25 tangible book arguably sets a new bar for UK bank M&A deals.
Here are some ‘theoretical’ examples as to why ‘regulatory clarity’ matters:
If no changes to the MREL regime of relevance to MTRO or OSB Group (OSB) were effected (see Appendix 1 for my assessment), then these banks and any other banks that expect to become MREL-compliant in the medium-term may be stimulated to consolidate to support reduced MREL costs. For example, OSB and Charter Court argued, in 2019, that their merger allowed them to achieve the necessary scale to meet MREL more efficiently (both were - arguably - headed towards the lower bound threshold), reduce the associated costs (rather than both independently issuing MREL-eligible debt at a higher combined cost), and enhance their ability to access capital markets for such issuances. While there was some cynicism in relation to these arguments at the time (was Charter Court really on the verge of becoming MREL-compliant?), the larger the balance sheet, the better the prospects of issuing MREL-eligible debt at a keen price.
If MTRO were to fall out of the MREL regime / no longer be required to issue MREL-eligible debt at some point (I believe the PRA has now paved the way for this, which I explore in detail in Appendix 1) it would be transformational from an earnings perspective - now it goes without saying that any such change wouldn’t be effected overnight, but to give you some perspective on this, in FY24, the bank incurred £63m of interest expense on its MREL debt in issuance of £525m (which carries a coupon of 12%). The cost of replacement funding / opportunity cost of holding less HQLAs (MTRO is essentially ‘overfunded’) would likely have been a fraction of this £63m, so I estimate FY24 net interest income (NII) would have been ballpark 15% higher than the reported £378m. Such a structural change in the funding cost base could make the bank a much more attractive takeover candidate, for example.
If the PRA lifts the Leverage Ratio retail deposits threshold to £70bn from £50bn it could influence how the likes of Investec (INVP), Yorkshire Building Society (which is also pursuing IRB accreditation), and Skipton Group - to name just a few - think about how their businesses scale from here.
More M&A?: What are the Possibilities?
I explore some below - it’s obviously not exhaustive in terms of the possibilities and I will likely do further in-depth theoretical scenario analyses on possible combinations in due course.
1️⃣ Further activity amongst the ‘Big Six’
While, at first glance, it doesn’t seem likely that material further M&A activity could emerge amongst the ‘Big Six’ lenders, there could be further value creation angles to pursue.
So, what are the possibilities?
A combination that has been touted on various occasions in the past is that of Barclays (BARC) and Standard Chartered (STAN) - see FT article here from May 2018, for example. Both stocks have rerated significantly since then (and the STAN CFO recently commented that it sees acquisitions as a realistic possibility now given its stock was then trading at close to tangible book value (it’s now trading at >1x tangible book value) - which is not to suggest he had BARC in mind!) but still trail their larger peers on a P/TBV basis. However, the primary rationale for the reported exploratory discussions in 2018, i.e., contingency planning on the part of BARC in the context of activist pressure, has dissipated and BARC’s refreshed strategy now is to grow its UK presence (with a stated target to reduce the proportion of Group RWAs attributable to the investment bank to c.50% by end-FY26 - from 56% at end-1Q25). That said, while there would be compelling theoretical strategic benefits through geographic diversification and complementary business lines in a merger of the two, the integration challenges and regulatory hurdles would be substantial.
Santander has now agreed to acquire TSB (consult Financials Unshackled Issue 52 here for a detailed write-up on the deal), which, arguably, reaffirms its commitment to the UK following months of speculation about a potential exit (I penned a special issue - Financials Unshackled Issue 31 - on ‘What Now for Santander UK?’ on 29th January here). TSB builds a bit more scale in UK mortgages for Santander UK (SAN UK) but the deal is essentially a cost takeout play in the main - plain and simple. And Santander will need to show delivery given the price it paid (1.45x end-1Q25 TSB tangible book value). But does it mean a Santander exit from the UK is completely ‘off the table’? Maybe but not necessarily. Various combinations had been speculated in the City when it appeared that Santander was looking at an exit: i) would Barclays (BARC) or NatWest Group (NWG) acquire SAN UK?; ii) in simple terms would HSBC (HSBA) swap its Mexican business for SAN UK?; iii) would BARC swap its US Cards business for SAN UK?; and iv) could STAN seek to acquire SAN UK, cementing a forceful UK presence in the process and capturing meaningful revenue diversification? Santander has now agreed the take-out of an asset (TSB) that was desirable to BARC particularly and, arguably to a lesser extent, NWG (NWG is keen to grow in mortgages but has stressed that it has not leveraged its primary deposit customer base as strongly as it could in this vein, pointing to an organic growth opportunity). Given the lack of further potential takeover targets in the mainstream mortgage market (TSB sold, Virgin Money UK (VMUK) acquired by Nationwide, Co-op Bank gone to Coventry), the soon-to-be-enlarged SAN UK might be, at the margin, an even more compelling takeover candidate for some of the aforementioned names (TSB doesn’t change the assessment from a market share concentration perspective in my view). Of course, there are other permutations - for example, could BARC’s IB business (and/or its US Cards business (as flagged above - and a useful hedge in the context of IB earnings volatility it could be argued)) be attractive to Santander given the latter’s ambitions in this space. And, maybe BARC’s UK business is also attractive to Santander. Indeed, a combination of the these two groups could bring other options. Or, even more broadly, could SAN and STAN get together I wonder?
2️⃣ Big Six acquire challenger / specialist lenders
Perhaps what is more likely - at least in terms of potential transaction activity volume if not value - is further acquisitions of smaller lenders by the ‘Big Six’. To the extent that any of the ‘Big Six’ see large-scale transformational M&A as ‘off the agenda’ now they may be tempted to swoop on smaller rivals in a bid to drive further growth and eps accretion. Nationwide struck a plum deal to acquire VMUK in 2024 at a price of just c.0.6x tangible book (ignoring costs associated with the trademark licensing agreement) - despite the fact that VMUK had been generating close to 10% RoTEs, the market valued it at a deep discount to book so it was a deal that made sense for all parties at that time in my view. BARC acquired Tesco Bank’s retail banking business for just 0.6x tangible book value - a business that adds strategic capabilities to BARC, presents substantial funding and operating cost synergies, and gets BARC closer to achieving its stated target to reduce the proportionality of Group RWAs attributable to its IB to c.50% by end-FY26. However, the acquisition of TSB by Santander UK seems to set a new bar in terms of bank valuations in M&A and it seems unlikely that future deals will be as keenly priced as these two.
So, what are the possibilities?
Mainstream challenger lenders: There are few opportunities remaining to acquire mainstream challenger lenders (the second quadrant in the above graphic - with the three names at the top of that quadrant having been acquired already) - unless the ‘Big Six’ go down the road of hoovering up medium-sized building societies (which seems highly unlikely to me).
The majority shareholder in Metro Bank (MTRO) Jaime Gilinski Bacal acquired the lion’s share of his stake at just 30p per share and, judging by his track record, his playbook is to build a substantial position at a keen valuation and realise gains on a sale of the business. So something is surely likely to manifest in due course but it’s not clear to me that one of the ‘Big Six’ would swoop any time soon given they weren’t willing to make an affirmative move when MTRO’s stock traded at a much lower price (there has been plenty of chatter around numerous banks and ‘running the rule’ over MTRO in the past) - and there would likely be concerns in relation to the desirability of MTRO’s physical store network as well as the value attached to the property assets on its balance sheet.
Bank of Ireland Group’s (BIRG) Retail UK business reported £16.9bn of net loans at end-FY24 and may be a potential target (notably, it does include a significant Northern Ireland presence). While its average UK retail deposit balances of just under £10bn in 2H24 (total UK deposits, including commercial amounted to £12.2bn at year-end) represented just 10% of total group deposits, the £176m of associated interest expense (a chunky gross yield of 3.43%) represented 58% of the total interest expense on its deposits (effectively a reflection of the uniquely ultra-thin deposit funding costs in the Irish market) - and BIRG would likely see material net interest margin (NIM) accretion were it to exit this business. In the past it may have been more difficult for BIRG to sell its UK business given the partnership with, or more particularly, dependence on the Post Office network on the lending side but its announcement on 5th December 2023 here to the effect that the partnership will “…no longer provide Post Office branded mortgages or personal loans” shows that it is no longer dependent on the network for originations, which should enhance exit optionality. That being said, BIRG did extend its partnership with the Post Office on the savings side for a further five years to a minimum end date of 2031 so there would likely be much delayed funding cost synergies for an acquirer and/or substantial exit costs.
AIB Group (AIBG) reported that AIB UK net loans stood at just €4.9bn at end-FY24 (approx. 75% GB Corporate, 25% NI Retail) and, for what it’s worth, I don’t see this business as a likely sale candidate with AIBG likely to continue to preserve a light UK presence for now at least - and, most likely, for the long-term, I think. More growth (notably, new lending was +30% y/y in FY24) could bring optionality in time, however.
Bringing in the digital lenders to the discussion, I categorically do not see any of the ‘Big Six’ contemplate - even for just a moment - a potential acquisition of a mainstream digital lender like Monzo or Starling Bank. While there may be some tech capability benefits, their owners’ reported valuation expectations are completely divorced from the reality of listed bank valuations - and that is fact based on current and historical trading multiples, not a view. Others like Allica Bank, Atom Bank, OakNorth, and Zopa could become takeover targets in time - but these are largely young companies in growth mode who are unlikely to be of sufficient scale to stimulate the interest of the larger players - so, unless one of the ‘Big Six’ were hellbent on getting access to their underlying technology, it feels like a stretch.
Specialist challenger banks: There are a number of potentially attractive takeout candidates in this space but one overarching issue is that the numbers don’t really ‘move the dial’ enormously for the ‘Big Six’ so it would be dangerous to ascribe a high probability to any of these potential transactions culminating - unless the target was addressing a shortcoming in the core business like the way in which Kensington’s coveted proprietary technology platform was appealing to BARC. For context - and putting INVP (which has a substantial South African business) aside - OSB is the largest listed specialist lender in terms of market capitalisation at just over £2bn as of the close of trading on 15th July - which pales in comparison to the market capitalisations of BARC (£48.6bn), HSBA (£160.5bn), LLOY (£45.7bn), and NWG (£39.8bn) at the same date. Indeed, it seems far more likely that the ‘Big Six’ are more interested in eking out opportunities to acquire non-interest revenue businesses - for example, in the wealth management domain. But we have seen very little activity of size in this context (save for LLOY’s acquisition of Embark, perhaps) and, while transformational combinations are imaginable (for example, with the likes of an AJ Bell (AJB), a St James’s Place (STJ), and a Hargreaves Lansdown), a major obstacle is the earnings multiples at which these business trade relative to banks - and, by way of an example, the NWG CEO Paul Thwaite has remarked in recent months that there is a large disconnect between the price expectations of vendors of fee-focused businesses and the price that NWG is willing to pay. I could go on and write about asset managers and insurance companies as targets but I think it’s best to stop here on this ‘off-piste’ ramble.
Without putting together a full list, specialist lenders like Close Brothers (CBG), OSB, Paragon Banking Group (PAG), Shawbrook, and Together (a non-bank) to name just a few could add some juicy net interest margin enhancement to the ‘Big Six’. Indeed, they could be run as standalone businesses and acquired solely for potential value creation benefits where the implied required return on equity for investing in these businesses is typically considerably higher than for the large listed lenders (based on comparing price / tangible book value multiples to RoTEs) - though such benefits could potentially be offset by a slight derating post-acquisition to reflect this dynamic.
Of course there are a whole host of smaller banks and non-banks as well as loan portfolios that come to the market occasionally too but this is not intended to be a comprehensive discussion of every possible option.
3️⃣ M&A amongst challenger and specialist banks
For me, this is where we are likely to see the largest volume of deal activity. It is important to, firstly, set out a couple of reasons as to why deals could make sense amongst challenger and specialist banks - and bank management teams need to think strategically about how their own competitive position could be affected by various developments as they gauge their appetite to acquire / sell:
Current account capability is a potential ‘game-changer’: I recall remarking on record in the past that cheap and sticky deposits are the ‘holy grail’. Some of the challengers have current accounts capability (MTRO, Monzo, Kroo, Starling - and now Zopa too) as do a number of the building societies. Combining a current account franchise with high-yielding specialist lending activities is a recipe for high returns - although, based on the BoE’s Policy Statement on MREL (published yesterday here - and which saw no change effected to the transactional accounts threshold) the potential associated drawback owing to MREL requirements kicking in (above a relatively small size) is an important factor (though do read Appendix 1 as it is not so ‘cut and dried’ any more in my view) - as are the associated operational costs and risks (e.g., AML, compliance). The returns-enhancement potential is, in my view, likely to explain why Shawbrook’s private equity owners have reportedly engaged in talks with the likes of MTRO and Starling Bank. While the reported valuation expectations of neobank (e.g., Monzo, Starling) owners bear no correlation to listed bank valuations (fact), other specialist lenders could also consider joining forces with a MTRO or, in time, a Zopa (provided the latter ‘proves concept’ in a current account build context within acceptable cost and risk management parameters). If any such deal were consummated it could have significant ramifications for the competitive backdrop (e.g., improved pricing capability for the consolidating entities, putting the squeeze on lending competitors).
IRB accreditation could drive material excess capital crystallisation and transform returns: Some banks and building societies are pursuing IRB accreditation for their credit risk models (explained above) - for example, Atom Bank for its residential mortgages portfolio, CBG for its development finance portfolio, PAG for its BTL mortgages portfolio and its development finance portfolio, and Yorkshire Building Society. Excess capital crystallisation upon accreditation (to the extent that these businesses are successful in their applications) could better position some of these players to go on the offensive in a M&A context - and could make them desirable acquisition targets in a bid to acquire IRB capability (though that is not straightforward or a ‘slam dunk’ by any means with the PRA judging every portfolio application on its own merits). Again, to the extent that any of these lenders do attain IRB accreditation, it could have significant ramifications for the competitive backdrop more broadly, e.g., in a pricing power context - especially if these players were also to pursue M&A.
Finally, putting aside current account capability and IRB accreditation, deals can also make much sense on the grounds of: i) funding cost synergies; ii) operating cost synergies; and iii) potential revenue synergies.
So, what are the possibilities?
Without getting into an elaborate discussion, here are a few thoughts:
Could CBG become a target once there is more clarity in relation to what the final cost of the motor finance debacle could be? At what multiple will it trade? It’s a complicated multi-faceted business, which may be a barrier to a sale but it is notable that it has been selling businesses in a bid to refocus, build capital, and, perhaps, ‘slim down’ to make it a more viable takeout candidate (even this small deal announced yesterday to sell Close Brewery Rentals is another example). I have speculated in the past that PAG and CBG could be a good fit (builds scale in development finance with both banks pursuing IRB accreditation, more diversification, strong risk cultures).
Nigel Terrington, the CEO of PAG, recently commented in an interview with The Times that PAG sees itself as a “consolidator” - which I wrote about in Financials Unshackled Issue 52 here. He has made these remarks on and off over the years and while we haven’t seen anything recently, PAG does have form in this respect under the stewardship of Terrington - opportunistically acquiring distressed loan portfolios through Idem that were earnings accretive in the aftermath of the GFC, the acquisition of Five Arrows in 2015, Premier Asset Finance in 2016, Iceberg in 2018, and Titlestone Property Finance in 2018 to diversify into commercial lending activities. Targets could range from smaller lenders to the likes of a CBG to the likes of a current account franchise (though I see the latter as highly unlikely, and, strategically, PAG has been working for many years on seeking to incentivise other banks’ current account customers to migrate some of their excess savings to PAG - with its latest initiative, the digital savings app Spring, offering attractive easy access rates through an Open Banking platform). As an aside, on the latter, if PAG can ‘crack this nut’ - which also, in my view, means driving down the cost of the easy access product it is offering through this channel significantly over time, it will prove strategic genius in the context of the novel development of a low-cost deposit acquisition channel, potentially at a much lower cost than what it would have taken to build a current account franchise for a bank of this scale.
Other names that could potentially be acquisitive include Aldermore (deep- pocketed parent), Shawbrook (as noted above - and, potentially, more widely), Skipton Group, and Yorkshire Building Society (had reportedly been evaluating a bid for TSB, according to a Bloomberg article here - and while that seemed a stretch (in advance of IRB accreditation at least) maybe getting its name out there was just a ruse to message that YBS is acquisitive and it also might mean that YBS is expecting a near-term ‘win’ in the context of its IRB application).
Additionally, private equity (PE) shareholders in the likes of Atom Bank, Castle Trust Bank, Hampshire Trust Bank, and NewDay (and, in time, United Trust Bank) may be keen to realise their investments at some point.
Indeed, there have also been rumours swirling around Together for years. Will it IPO? Will a bank acquire it? It is surely likely that the founder and controlling shareholder, Henry Moser will seek a liquidity event at some point.
Others seem more intent on eyeing up IPOs in the future - for example, Allica, Monzo, Revolut, Starling, Zopa - though that is not to say that others (e.g., Atom, Shawbrook) won’t pursue this route either.
4️⃣ Overseas acquirers swoop
Without getting into the weeds, there is always the possibility that an overseas acquirer takes an interest in a UK bank. However, rerated stock valuations it may be less likely now than in the past.
Indeed, there are a number of overseas banks who are already active in the UK market - including BBVA (Atom Bank), Handelsbanken, JPM (Chase UK), Marcus (Goldman Sachs), Santander, and State Bank of India. However, Santander aside (discussed above), I don’t expect that any will be acquisitive. Questions have been raised as to whether Chase UK would play predator to gain scale quickly but my own view is that an acquisition would be entirely inconsistent with its strategy, i.e., to self-develop a digital bank that can prove concept in the context of muscling in on mainstream lending and deposit-taking markets at a lower cost over time.
5️⃣ Private equity pounces
While the increased financial leverage that is a hallmark of most private equity (PE) transactions is not really an angle it can bring in the context of bank acquisitions, we have seen active involvement amongst PE shareholders in the sector.
For example, AnaCap acquired Ruffler Bank and Cattles, merging them into Aldermore many moons ago. J.C. Flowers essentially founded OSB - transferring its shareholding in the trade and assets of Kent Reliance Building Society, together with a £50m capital injection, into the business in 2011.
More currently, it is notable that: i) Pollen Street Capital and BC Partners have an equal (majority collectively) share in Shawbrook; ii) J.C. Flowers has a shareholding in Castle Trust Bank; iii) Alchemy has a shareholding in Hampshire Trust Bank; and iv) Warburg Pincus recently acquired a minority shareholding in United Trust Bank.
Of course we could see more PE involvement in the space but the Prudential Regulatory Authority (PRA) is not typically a major fan of these deals as I understand it because the capital raised at the holding company level (usually involving Jersey HoldCos in the case of UK bank equity acquisitions) sits above the operating bank in the group structure and the investment is not seen as true CET1 capital in its purest form.
Appendix 1: MREL Considerations
For clarity, in the Policy Statement on MREL yesterday, the PRA has: i) lifted the Total Assets threshold to £25-40bn (this neatly still keeps OSB in the regime - and has, rather unsurprisingly, been publicly welcomed by the Paragon Banking Group (PAG) CEO given that PAG’s last reported total assets figure of £19.2bn is materially below the new ‘lower bound’); ii) maintained the transactional accounts threshold (this neatly keeps MTRO in the regime at first glance, though do read on); iii) made a “targeted change” (lifting language from the October 2024 CP) to MREL calibration such that, for transfer preferred resolution strategy firms, MREL would generally be expected to be set equal to the Minimum Capital Requirement (MCR) (this was proposed in the October 2024 CP and is now confirmed); and iv) very importantly in the context of iii), appears to have potentially paved the way for MTRO to adjust its resolution strategy from ‘bail-in’ to ‘transfer’ in due course.
On this last point, the following highlights taken from the Policy Statement are noteworthy:
The Policy Statement goes on to note: “For firms below £25 billion total assets, the Bank will determine whether a modified insolvency or a transfer preferred resolution strategy is appropriate. The Bank’s existing indicative 40,000 to 80,000 transactional accounts threshold (accounts from which withdrawals have been made nine or more times within a three-month period) supports preferred resolution strategy setting for these firms, as an indicator of the potential impact from discontinuity in the provision of certain firms’ banking services. Its aim is to ensure that smaller firms below the total assets threshold which large numbers of customers rely on for their day-to-day banking services have adequate capabilities to be resolved through a transfer to a private sector purchaser…In most cases, firms with total assets of less than £25 billion can be expected to enter modified insolvency upon failure and therefore do not need to meet MREL or maintain additional capabilities to prepare for their failure. A transfer strategy may nevertheless be set in circumstances where the Bank assesses that a firm below £25 billion total assets would pose an unacceptable risk if it entered modified insolvency. The Bank considers the indicative threshold of more than 40,000–80,000 transactional accounts to be an important supervisory intervention point for when a transfer strategy may be needed for such firms. But such a firm will not be required to meet MREL above MCR.”.
And, on timing, the following extracts from the Policy Statement are relevant: “If a firm’s strategy were to change from bail-in to transfer or insolvency, and therefore MREL equal to MCR, this lower MREL would apply when the Bank changes the firm’s MREL direction under the Banking Act. For the avoidance of doubt, moving to a lower MREL is not subject to the transitional provisions in the MREL SoP. Any changes to a firm’s preferred resolution strategy in light of the Bank’s revised policy would not come into effect until 1 January 2026 at the earliest. This would be a firm-specific judgement and the Bank will engage directly with affected firms as part of its ongoing engagement on resolvability.”.
Going on the above, consistent with the October Consultation Paper, it seems to me that MTRO should be eligible to move to a ‘transfer’ resolution strategy in time, which would obviate the need for the bank to raise MREL-eligible debt providing it is meeting minimum capital requirements. Indeed, MTRO’s issuance of AT1 paper in March is extremely constructive in this respect and I opined on this issuance in Financials Unshackled Issue 41 here, noting that the demonstration of capital markets access as well as pre-funding a potential collapse of the requirement to issue MREL-eligible debt may have been the reasons explaining why the bank decided to issue £250m of AT1 at a chunky 13.875% coupon at a time when it didn’t need to do that.
I’m not clear what it would mean for retiring existing MREL debt but maybe the company will say something on all of this soon. This would be enormously constructive for its profitability prospects (see my math above in the main note).
As a final note, of course one could also argue that MTRO could seek to become a modified insolvency firm meaning that MREL requirements would simply be no longer applicable (rather than move from a ‘bail-in’ to a ‘transfer’ preferred resolution strategy) based on this first part of a sentence extracted from the Policy Statement: “firms below the Bank’s total assets or transactional accounts indicative thresholds can generally expect to be a modified insolvency firm…”. However, that same sentence goes on to note: “…,unless the risks of their entry to resolution are unacceptable, in which case a stabilisation power resolution strategy would be adopted”. You cannot look at these things robotically and my gut is it would be a step too far for the PRA to allow MTRO fall out of the regime altogether and I think, were MTRO to seek to apply to become a modified insolvency firm rather than seek to go down the ‘transfer’ resolution strategy route, it would be told by the PRA that an insolvency of the firm would be an unacceptable eventuality (fair in my opinion), meaning that MTRO would need to retain a stabilisation power strategy, i.e., ‘bail-in’ or ‘transfer’. So, my view is that I don’t see MTRO pursuing a modified insolvency firm application.
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