Last week saw another false start in the consolidation of UK challenger banks as Carlyle ended its pursuit of Metro Bank. With over 30 new banks having been authorised by the regulator in the last 8 years as well as numerous non-bank players, such as peer-to-peer lending platforms emerging, the UK banking scene has become an increasingly competitive landscape.
In a sector where new entrants tend to focus on single services or demographics initially, with a broader offering strategized in the longer term, consolidation has long-since seemed like a natural part of the cycle.
Challengers have had success by pitching attractive digitally-focussed propositions to selected (and often under-served) parts of the market, making big strides in customer acquisition but often running at significant losses due to platform development and marketing spend.
The traditional banks may lag behind in new customer onboarding - and see cash drag from long-term digital transformation projects of their own - but they still win on key value driving metrics such as net interest margin, average balances and profit per customer.
With long-term value generation requiring both top-line growth and positive financial metrics, different players continue to have very different levels of success in different parts of the banking value chain. It is therefore logical to believe in considerable latent synergies, and – at a market level – significant value to be generated by intelligent consolidation.
With many of the newer players presumably eyeing trade sale as an exit strategy from the outset, and larger players recognising the benefits of bolt-ons, the key ingredients are there. But it still remains unclear who has the appetite, expertise and credibility to lead consolidation, or when will be deemed as the right time to strike.
Optimal combinations happening at the right time, at the right price, is critical to overall value enhancement in a consolidating market and understanding the point-in-time value of potential targets, and the value-impact of synergies and integration costs, is key.
Everyone broadly agrees that the challenger bank market needs to consolidate. But Co-operative Bank’s tilt at TSB went nowhere and private equity group Carlyle on Thursday said it had ended talks about buying Metro Bank