The animal spirits unleashed by Donald Trump’s re-election were supposed to spur a flood of US dealmaking. Instead, Wall Street’s finest have been sitting on their hands while volatile equity markets and escalating trade warfare undermine any attempt to value businesses.
The deal jitters have spread to this side of the Atlantic, too. But some bankers in the City of London are now daring to hope for a flurry of mergers and acquisitions, especially in the resurgent banking sector itself. “All the big UK banks have expanded their internal deals teams in the past few months,” says one bank boss. “Consolidation is back on the agenda.”
Acquisition activity among Britain’s banks has been muted since the 2008 financial crisis, when Royal Bank of Scotland became an advertisement for how not to do M&A: collapsing after the €71bn purchase of Dutch rival ABN Amro stretched its finances too far.
That same RBS, renamed NatWest, is now top of bankers’ lists of likely consolidators. Its shares are up 83 per cent in the past year, partly in anticipation that the last of the government’s state bailout shareholding will be back in private hands within weeks. Last year it bought most of Sainsbury’s Bank and it now seems keen to expand further, capitalising on a relatively powerful acquisition currency: its shares, now trading around one times the book value of its net assets.
Barclays, too, has been cautiously acquisitive — last year it snapped up the bulk of Tesco Bank’s business. The top two building societies have meanwhile done the biggest deals, Nationwide buying Virgin Money and Coventry buying the Co-operative Bank. Yorkshire Building Society, the number three, is also rumoured to be deal-hungry.
Predators’ appetites are growing just as a number of smaller rivals have emerged as potential candidates to be acquired. The Financial Times reported last month that NatWest had held senior-level discussions with Santander to purchase the Spanish group’s UK retail banking business. Barclays earlier discussed a potential deal with Santander, too. Santander UK’s performance has been dragging down the broader group. TSB, also Spanish-owned, is widely expected to be sold, especially if parent Sabadell submits to a takeover attempt by domestic rival BBVA.
For now, little has progressed beyond exploratory discussions. But next month’s UK Supreme Court hearing on the legality of banks’ historic car finance commissions for dealerships will have big ramifications. If judges uphold last year’s shock appeal court ruling, several banks — among them Lloyds, Close Brothers, Santander and Barclays — could face compensation bills running into billions of pounds. “The whole sector would be uninvestable,” says one seasoned bank adviser. “It would be like a nuclear bomb going off.”
Close Brothers looks particularly vulnerable, given that car finance accounts for a large portion of its overall business. The ruling, whichever way it goes, should remove the uncertainty hanging over the valuation of banks caught up in the affair. That in turn may be a trigger for dealmaking, particularly between mid-sized banks. The most highly valued bank in that segment, Paragon — a buy-to-let mortgage specialist with less relative exposure to the car finance affair — is clearly interested in buying up rivals if the opportunity arises, with a weakened Close Brothers one of the obvious targets.
But bankers are realistic that larger deals could take longer to consummate. Santander UK, for example, is valued in its parent’s accounts at a far higher figure than it could realistically expect a NatWest or a Barclays to pay for it. TSB meanwhile could spend a year or more in limbo, amid obstacles to BBVA’s hostile offer for Sabadell.
Policymakers may at least be supportive. The UK government sees a bigger, more efficient financial sector as a key agent of its growth agenda. Several senior regulators, seen as obstructive to this mission, have left their posts. The Competition and Markets Authority recently reversed its antitrust opposition to an American Express acquisition. Regulators are also being lobbied by mid-sized banks to raise the threshold for an additional capital regime for lenders, a move which would make deals easier.
If all these pieces fall into place over the coming months, some bank deals may come to fruition. Who knows? US banks, such as JPMorgan Chase, might even grow so frustrated with Trump’s unpredictable America that they place some deal chips in the pro-growth UK.
patrick.jenkins@ft.com
This article has been corrected to clarify that Sabadell is currently subject to a takeover attempt by domestic rival BBVA.