British lenders Starling Bank Ltd. and TSB Banking Group PLC have each been touted as potential takeover targets, although the former are aiming for an IPO and the latter’s losses have increased during the coronavirus pandemic.
Starling has become one of the UK’s highest profile digital challengers since receiving its banking license in 2016 In contrast, TSB is a high street bank that has struggled on the technology side.
Both Lloyds Banking Group PLC and JPMorgan Chase & Co. have been reported as potential buyers of Starling, the all-digital bank founded by veteran banker Anne Boden: Lloyds for the bank’s digital technology, said The times, and JPM for its client base ahead of the launch of its Chase retail banking brand in the UK next year. Boden has insisted that the bank is not for sale and that it still has its sights set on a public listing.
Starling, which declined to comment, launched its first mobile current account in 2017 and the first digital business account in the UK in 2018. Unlike some digital rivals, its more diversified revenue stream means less than half of its business comes from card transaction fees. It has been losing every month since its launch until it reported an operating profit of £800,000 in October this year.
TSB is part of Banco de Sabadell SA, and the Spanish group, plagued by weak earnings and low capital levels, is evaluating options for its UK business. TSB is likely to attract interest from potential buyers, including Virgin Money UK PLC and One Savings Bank PLC, Mortgage specialist Kensington Mortgage Co. Ltd. and credit card company NewDay were also named as potential bidders in an auction, according to Reuters.
competition in the market
TSB CEO Debbie Crossland was hired after the 2018 tech debacle that left millions of customers locked out of their accounts and led to the departure of her predecessor, Paul Pester. As part of Crossland’s three-year recovery plan, the bank will shed nearly 1,000 staff and close 164 branches. The IT incident cost the lender £366m, including customer compensation, and is still making losses.
After merger talks between Sabadell and Banco Bilbao Vizcaya Argentaria SA collapsed, Sabadell said it would look for opportunities to create shareholder value “in relation to the group’s international assets, including TSB”. TSB declined to comment on Sabadell’s strategy but said it has seen good momentum in the underlying business growth and is reducing overall costs.
Deutsche Bank analyst Kazim Andac said Sabadell, which did not respond to requests for comment, is keen to put TSB on the market for a sale, but it may find that during the delays caused by the end of the Brexit disruptions caused by the transition period is subject to significant competition for interest.
“There are many challenger banks in the UK looking for suitable bidders, such as Sainsbury’s Bank and the Co-operative Bank,” he said.
Goodbody analyst John Cronin said Virgin Money may be tempted to bid for TSB to accelerate funding cost reductions. That would boost yields on mortgages, which account for about 80% of Virgin’s revenue.
Another UK-based analyst, who declined to be named because he wasn’t authorized to speak publicly to the press, said Sabadell’s problem in spinning off TSB was a lack of buyers, as the big banks didn’t should buy.
Virgin Money is the logical acquirer, the analyst said, as the goal is to be a universal bank, not OneSavings Bank or Kensington.
What’s next for Starling?
Meanwhile, Declan Ferguson, Starling’s chief strategy officer, said in a webcast conversation with Goodbody analysts that the bank has about 1.6 million retail customers and about 225,000 small and medium-sized business customers.
Ferguson said that the number of SMEs Account openings had increased in 2020, due in part to Starling’s provision of government-backed coronavirus loans.
“We really had to be part of these programs to be seen as a credible alternative to the incumbent banks,” he said.
The bank increased its deposits to £3.96 billion in October 2020 from £897m the year before.
However, Shore Capital analyst Gary Greenwood warned that there have been question marks over lending to SMEs during the pandemic.
“The question is how much lending to SMEs is profitable given that much of it will be government-backed lending and banks can make a decent economic return on the larger coronavirus business interruption loans, but the smaller bounce-back loans are something else never mind,” Greenwood said.
Competing digital bank Monzo Bank Ltd. has more customers than Starling but has struggled during the pandemic, cutting jobs and warning earlier this year that there were “significant doubts” about its ability to continue as a company.
Starling and other digital banks would rather focus on building a large customer base over a five-year period and then selling it to an incumbent operator, said the analyst, who asked to remain anonymous.
However, Ferguson was optimistic about the bank’s continued growth, predicting it would have £8 billion to £10 billion in deposits a year from now.
Starling has raised just over £260m in equity funding and received £100m from Banking Competition Remedies Group to support SME banking.