When the Co-operative Bank last put in a bid for TSB, it had yet to discover a £1.5bn capital black hole in its own balance sheet, that its then-chair had a drug problem, and that it would need to be bailed out by its bondholders.
That put paid to the planned acquisition in 2013. This time around Co-op Bank has simply been spurned by TSB’s owner, Banco Sabadell. The Spanish lender says it is not interested in selling.
It is a sign of how far Co-op Bank has come that it is in a fit enough state to bid for anyone. But the fact it has come courting for TSB again eight years after it failed to buy the bank from Lloyds shows how little competition in British high-street banking has evolved in that time. Analysts keep predicting consolidation. It keeps not happening.
In 2013, Lloyds was being forced to spin out TSB to satisfy state aid issues arising from its crisis-era acquisition of HBOS. Selling off 600 of its branches along with the TSB brand was designed to create a new “challenger” bank.
But there were worries about how to give the new bank the heft to compete with the big high street incumbents. The Independent Commission on Banking said in a 2011 report “there is a real danger that [TSB] will fall back into the range of small banks that have not exerted a strong competitive constraint in the past, if it remains at its current size”.
When the ICB wrote its report, TSB had a 4.6 per cent share of the market for personal current accounts, a size that put it “on the borderline of subscale banks that have failed to grow significantly in the past” the ICB said.
In 2020, it had a 4.3 per cent share. The ICB’s fears on that front would appear to have been realised. And despite pro-competition measures to encourage account switching and the rise of digital-first competitors, customers have proved difficult to dislodge from the biggest banks.
If challengers simply lack the scale to compete, combining should be the obvious solution. Yet — aside from some deal-doing by Virgin Money — they are not getting together.
Not only did Sabadell reject Co-op Bank, Sainsbury’s shut down sale speculation over its bank on Friday. Having entertained offers, it concluded “these do not offer better value for shareholders than will be realised through retaining Sainsbury’s Bank”. Co-op Bank received its own takeover approach from private equity firm Cerberus last year. That also went nowhere.
Consolidation could happen. Economies of scale and the need to cut cost to income ratios mean it should happen. But it still seems unlikely to just yet.
Sabadell and Sainsbury’s rejections point to a valuation gap between what sellers think their assets are worth and what buyers are willing to pay. Part of the problem is where we are in the interest rate cycle: poised for the first rises in years. Persistently low rates have made it harder for any bank to make money. So they have taken hard decisions, hacking back branch networks, making multiple rounds of redundancies and moving online.
Those cost-cutting measures are only now starting to pay off. The list of turnround stories in the UK mid-market is long, encompassing almost every non-specialist bank out there. Profits have only recently reappeared at Virgin Money, TSB and Co-op Bank.
That makes non-distressed deals possible once again. It also makes pricing a bid difficult. Co-op Bank is reported to have offered £1bn or more for TSB. That is equivalent to about 0.6 times current tangible book value, Jefferies analysts estimate. But across the sector, valuations have climbed closer to 0.7 to 0.9 times. Sabadell paid £1.7bn for TSB in 2015. A wait-and-see approach makes sense for Sabadell for as long as it continues to wrangle with domestic profitability issues in Spain and performance at TSB continues to improve.
Ultimately, though, TSB and the rest of the mid-market banks remain subscale. They face more effective competition from the big banks after the pandemic forced everyone to improve their online services. The challengers cannot afford to let another eight years go by in which they do not get their act together.
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