A possible sale of TSB Bank is back in focus as Spanish parent Sabadell grapples with a rare hostile takeover attempt by larger domestic rival BBVA.
BBVA presented its €12.2 billion (£10.5 billion) all-share merger proposal directly to shareholders earlier this month after Sabadell’s board rejected its first proposal.
If the purchase of Sabadell is successful, the future of TSB would be in question given the different strategies of the two lenders in the UK.
BBVA, the second-largest bank in the eurozone after Santander, has a much smaller presence in the country and holds a large stake in the app-based Atom Bank.
“TSB is a relatively small piece of the puzzle, but it represents an additional complexity for BBVA, which ultimately does not want the asset in the UK market given its size,” said Benjamin Toms, analyst at RBC Capital Markets. City AM
There are immediate incentives for BBVA to offload the business. Although the bank has said it has “no scope” to improve the economics of its offer, analysts at Barclays argue it could increase its offer by selling TSB.
They said the move would “enable BBVA to include a cash portion of up to 10 percent of the offer” and would have a “limited” impact on BBVA’s Common Equity Tier 1 capital if the sale was in line with Nationwide’s recent deal with Virgin Money.
In a conference call with analysts earlier this month, BBVA CEO Onur Genç said it was “too early to say” whether the bank would keep TSB if the takeover attempt was successful.
“We can only respect what Sabadell has at the moment,” he added. “They are a franchise that we admire, that we like, and TSB is part of it. But the decision will be made in due course.”
Dealmaking frenzy
The speculation comes as a wave of consolidation sweeps the UK’s mid-sized banking sector, with Virgin Money, The Co-operative Bank and Tesco Bank all agreeing mergers with rival domestic banks this year.
TSB has around five million customers and a loan volume of £36 billion. Its 211 branch network is the seventh largest in the UK.
Like its up-for-sale rivals, the bank faces cost pressures and a lack of scale compared to Britain’s biggest lenders.
Earlier this month, TSB confirmed it would cut around 250 jobs and close three dozen branches to cut costs and switch to digital services.
Sabadell had previously considered selling TSB, but rejected an offer from Co-op Bank in 2021.
The following year, Sabadell CEO Cesar Gonzalez-Bueno denied that the bank was for sale despite other bidders’ interest, adding that he was “pleased that there are initiatives to buy (TSB) because it means that the bank is doing well”.
Nationwide and Metro Bank have recently been mentioned as possible bidders. The former is in the process of completing the UK’s biggest bank merger since the financial crisis, while Metro Bank was acquired last year by a Colombian billionaire with a penchant for taking over struggling banks.
“In our view, there are no natural bidders for TSB as banks generally do not want to add bricks and mortar branch networks to their balance sheet,” said Toms. “However, we would view Natwest as the path of least resistance.”
While City AM While Sabadell is not currently considering a sale of TSB, it is now under greater pressure to justify its ownership of a foreign bank.
TSB was founded in 1810 as Trustee Savings Bank and merged with Lloyds Banking Group in 1995. After the financial crisis, the company was sold and bought by Sabadell in 2015 for £1.7 billion.
In 2018, TSB’s new ownership ran into turbulent waters after an IT breakdown triggered by an attempt to transfer customer data to Sabadell’s new computer system.
The incident damaged TSB’s public image, led to the resignation of then-CEO Paul Pester and ultimately resulted in the Financial Conduct Authority imposing a fine of almost £49 million on the bank in 2022.
Will BBVA succeed?
A person familiar with the matter said City AM Sabadell assumes that the hostile takeover attempt by BBVA will hardly meet with approval among shareholders, also because there are many small investors among them.
However, RBC believes it is “more likely than not that BBVA will be able to successfully complete this transaction,” Toms said.
“The biggest hurdle is probably the Spanish Competition Commission,” he added. “Although they may impose changes to the strategic plan, we do not believe they will block the deal.”
The European Central Bank, which would have to approve any transaction, is reportedly backing a potential merger, believing that Sabadell’s focus on Spain and BBVA’s strong presence in emerging markets would diversify the merged group.
However, the Spanish government rejected the hostile takeover. Economy Minister Carlos Cuerpo warned that a merger would have damaging effects on the Spanish financial system.
The ministry has the legal power to block bank mergers and has six months to make a decision after consulting regulators. Sabadell has already accused BBVA of violating the rules governing corporate takeover bids by “presenting incomplete information that could affect the market.”
“By the time the Spanish government can give its opinion on the merger, it will be so far along that it will be difficult to stop the deal,” Toms noted.
