Merger push on ice for battered small lenders
Britain's battered smaller banks and other lenders are ripe for merging to create a bigger, stronger bank, but fragile markets and a grim economic outlook are likely to delay consolidation until some stability returns.
Banks must simplify products to avoid regulationBradford & Bingley, the UK's largest lender to landlords, is at the sharp end of concerns about smaller banks as it nears a 400 million pound cash call set to be backed by other banks but snubbed by its army of small shareholders as concerns over bad debts deepen.
An acquisition of B&B would solve a headache for regulators and the industry, removing the threat of a repeat of last year's embarrassing collapse of mortgage lender Northern Rock.
Analysts and bankers say rivals Alliance & Leicester and other lenders like Paragon, Bristol & West, Cattles and smaller building societies would all benefit from being pulled together. There are also multi billion-pound closed books of mortgages held by top investment banks that could be included.
Potential buyers or consolidators are watching with interest as valuations plummet, bankers and sources familiar with the matter, but they are not confident enough to pounce yet.
"It's very difficult to make deals happen because share prices are just so volatile. You could start negotiations and two days later the share price is 20 percent lower," said James Eden, analyst at Exane BNP Paribas. "And all the banks think they are worth more than the current price."
The logic for bringing together several of the smaller banks or other lenders would be to cut costs, strengthen their capital base to withstand shocks, improve credit ratings, and reduce funding costs at a time of tough wholesale markets.
The most public move so far has come from entrepreneur Clive Cowdery, who wanted to inject 400 million pounds into B&B and use it to spearhead consolidation of smaller lenders.
His restructuring vehicle Resolution said it had 2 billion pounds to spend on boosting capital in the sector, and after being rejected by B&B it's looking at other targets.
Other restructuring specialists and buyout firms, including JC Flowers, could also be tempted by depressed valuations and the prospect of a more favourable regulatory response.
CAVEAT EMPTOR
But some bankers have been sceptical of the capacity of investors to consolidate and conquer: "This is long on good ideas but a lot of bright people and those who advise them haven't been able to make it work," one industry banker said.
And for the moment, no suitors appear set to make a move.
"It's just too volatile a situation," another banker said, adding it was still too hard to value mortgage assets.
The eleventh-hour scrapping of a high profile rescue plan by U.S. private equity firm TPG Capital for B&B shows how the combination of a falling share price and a rapidly deteriorating UK housing market can deter suitors.
"For any domestic purchaser a deal (for B&B) would make a huge amount of financial sense, because the cost synergies are so big, especially compared to the tiny market cap," Exane BNP's Eden said. "The question is whether strategically any bank will be wanting to do it."
HSBC and Lloyds TSB have strong balance sheets and the firepower to take on a smaller lender, but both have signalled their acquisition interests are overseas.
Barclays has a less comfortable capital position and could use a purchase to further strengthen its ratios and bulk up its UK mortgage offer, but its sights are also abroad.
France's Credit Agricole considered a move on A&L two years ago, while Spain's Santander, reported to have held talks with A&L late last year, could use a deal for that or another bank to accelerate its revival of Abbey.
"We see the UK as more likely than Germany as the next M&A stop for Santander," said Arturo de Frias, analyst at Dresdner, adding a deal for A&L would be strongly accretive, but it "is a truly falling knife", and the Spanish bank could take its time.
Santander and other well-financed lenders may prefer to cherry-pick better quality mortgage business, as smaller rivals have withdrawn from the market, and as margins have risen sharply, and because organic growth is a less risky approach.
"(Consolidation) will occur, but it is difficult at this point in the cycle," said Leigh Goodwin, analyst at Fox-Pitt Kelton. "There is not a lot of strategic attraction in taking on those smaller players in a way there would be if the market was better," he said.
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