British Challenger Banks: Ripe For Consolidation?

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What's going on?

Africa’s biggest lender, FirstRand, will buy upstart British bank Aldermore in a £1.1 billion deal – shining a light on foreign buyers’ appetite for smaller British banks.

What does this mean?

UK banking has historically been dominated by a few large banks. After the financial crisis of 2007-08, consumer confidence in these banks was shaken – not long after, the UK handed out its first new banking license in over 150 years! Since then, a rash of so-called “challenger banks” emerged, like Aldermore. Aldermore offers its services online and by phone only (avoiding the cost of physical branches), which, along with its faster lending decisions, has helped it grow rapidly. Having a big bank behind it could help Aldermore expand its range of products.

The vast majority of FirstRand’s business is in South Africa, a country facing slowing economic growth; buying a British lender helps diversify its operations and increase its UK footprint (FirstRand already owns British car finance company MotoNovo).

Why should I care?

For the stock: Aldermore’s stock has had a great month since news of the deal first broke.

Last month, Aldermore’s stock jumped 20% after it was announced that FirstRand and Aldermore were in discussions about a deal, which suggested Aldermore’s investors (who include Goldman Sachs) expected to be paid a high price for their shares. After Monday’s confirmation its shares were up again, this time by 3%!

The bigger picture: Challenger banks are in the acquisition spotlight.

The increase in the number of challenger banks in recent years means greater competition, so pairing with bigger banks (who have more resources and products) can help the challengers grow, while giving the bigger banks footholds in specialist areas. Also, the weakness of the pound since the Brexit referendum has made valuations of challenger banks effectively cheaper for foreign buyers, and thus more attractive. Interestingly, also on Monday, Singapore’s sovereign wealth fund announced an investment in another British challenger bank, OakNorth.

Originally posted as part of the Finimize daily email.

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