With two of the UK’s biggest banking groups recently combining forces, James Wilson, Head of M&A and Transactional Risks at Factor Risk Management, tells us why he believes that the takeover of Virgin Money by Nationwide is part of a trend that is only likely to gather momentum over the coming months, with a wave of consolidation likely to hit the banking sector.
Last month it was announced that Nationwide had completed its £2.9 billion takeover of Virgin Money, bringing together two of Britain’s largest banking groups, with a remarkable 24.5 million customers combined.
After having been cleared by the Competition and Markets Authority (CMA) in July, and receiving approval from both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in September, Virgin Money will function as a distinct entity within the Nationwide group in the medium term and will operate under a separate banking licence. The deal puts Nationwide in a position to meaningfully challenge the UK’s four major high street banks in scale and market share.
This deal also represents the UK’s biggest banking merger since the financial crisis and is the latest in a string of high-profile takeovers of challenger banks which look set to reshape the country’s financial services landscape.
However, as building societies and banks look to takeover bids to build their profile and market share, it is also important to consider the impact of such deals on the UK’s M&A market and the factors behind this flurry of recent activity.
Since the start of the year, Coventry Building Society has acquired Co-Op Bank for £780m, Tesco has announced the sale of the majority of its banking arm to Barclays in a deal worth £1bn, and Natwest is set to acquire £2.5bn of customer assets from Sainsbury’s Bank. Needless to say, the CMA is carefully examining all such deals, and sometimes at a pace which some may find rather languid. Nonetheless, its clearance of the Nationwide transaction in July demonstrates that it is prepared to make reasonable decisions which support consolidation in the UK banking sector at scale. Such pragmatic decision making will be broadly welcomed and may well help to sharpen investor appetite for UK transactions.
A busy year for mergers between established financial institutions and building societies and smaller challenger banks, it is clear that the upper end of the market is flush with cash and keen to invest and, with interest rates and inflation stabilising, a significant wave of consolidation is about to hit the UK banking sector. As a result, we are seeing an increasing number of businesses utilising spare capital on accretive acquisitions – driving a wave of investment and a flurry in M&A activity.
The reasons behind this investment vary, but recent years have shown that smaller financial institutions are increasingly feeling the stress and strains of lower interest rates and government action, and mergers are therefore becoming an increasingly attractive option. In the case of the Nationwide takeover, for instance, this deal received backing from more than 90% of Virgin Money’s shareholders at a vote earlier this year.
Mergers with challenger banks with compelling fintech solutions may also present established banks with a way to rapidly improve and diversify their digital services offerings, and thus compete better for market share as customers increasingly embrace tech driven banking solutions.
Under mounting pressures for small banks, and with larger amounts of spare capital at the disposal of larger businesses, the market for UK M&A is only going to become a more attractive option for financial institutions – offering successful outcomes and stability for all parties involved.
James Wilson, Head of M&A and Transactional Risks at Factor Risk Management
