On October 12, RBS received notice that Santander UK would pull out of its planned acquisition of 316 RBS branches in England and Wales, the NatWest branch network in Scotland, and certain other SME and corporate activities across the UK.
RBS is now forced to go back to the drawing board. Unfortunately, NBNK – the AIM-listed company set up to establish a new entrant in the UK market by taking on over 600 Lloyds branches – having lost out to the Co-Operative Group, had disbanded by the time Santander pulled out of the deal for RBS branches.
Gary Hoffman, its chief executive and former head of Northern Rock, has taken a job as head of Hastings, the UK motor and home insurer. Meanwhile, M&A bankers suggest the Lloyds disposition had offered the best chance for a new entrant to make a splash in the UK market.
One surprise deal did go through last month. Barclays announced it has agreed to acquire the deposits, mortgages and business assets of ING Direct UK. Under the terms of the agreement, which is still subject to regulatory review, the £10.9 billion (€13.4 billion) of savings deposits and £5.6 billion of mortgages of ING Direct UK will be transferred to Barclays and eventually integrated into its UK retail and business banking division.
The deal is not good news for the UK authorities as they seek to encourage competition from new entrants. Rather it suggests the big will get bigger.
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| Jan Hommen, chief executive of ING |
ING Direct had won high scores for customer satisfaction, innovative technology and successful marketing, but Jan Hommen, chief executive of ING, sounds happy to be rid of it. He says: "ING Direct UK operated in a very competitive market over the past years." ING has not improved its capital position with this deal, because associated losses roughly equal capital freed up from the disposal of risk-weighted assets, but it should be earnings accretive. The deposit-heavy, asset-weak ING Direct could not generate earnings by paying market-leading savings rates in such a low base-rate environment.
One UK banker tells Euromoney: "The advantage ING had over Lloyds and RBS was that the sale was not required by regulators and there was no constraint on the universe of buyers relating to competition in the sensitive SME lending area.
"What the ING Direct deal shows is that the UK is a tough market, where the big banks still have a scale benefit. Because regulators have encouraged banks to reduce dependence on wholesale funding, that has bid up the price of deposits. New entrants in the UK banking market might be expected to secure their funding first, but this deal shows that having a lot of deposits costing 2% to 3% against base rate of 0.5% with only limited capacity to generate assets is a loss-making proposition."
ING is subject to a European Commission-imposed restructuring plan to compensate for receipt of state aid, but the sale of ING Direct was not part of that. The restructuring plan is dominated by the sale of insurance assets. Selling ING Direct was a commercial decision to help boost earnings per share. It also shows how difficult it will be for new entrants in the UK banking market.
They can go to the broker market for assets but as well as the obvious potential risks, the spreads on good-quality loans, such as prime mortgages, are always going to be low. Even the established banks with large branch networks to generate earning assets are saying how limited the demand to borrow is now.
Maybe UK regulators should pay attention to them.
