Private equity eyes up high-street banks
Carlyle’s bid for Metro may be just an appetiser before the hearty main course, says Matthew Lynn
Anyone walking down the high street over the last few years can hardly fail to have noticed Metro. The upstart brought some much needed pizzaz to the dull world of banks, redesigning its branches to look fresh, modern and vibrant instead of something that might have looked a little dowdy in 1955.
That was nice in its own way, but it hasn’t proved a great business model. Metro only has 1.7 million account holders. Hardly anyone ever goes into a branch any more, so it doesn’t make much difference whether the layout is nice or not. And it is very, very hard to persuade people to switch their accounts. Metro’s shares remain a long way below the 400p they were priced at when the firm listed in 2016.
Enter private-equity group Carlyle, which last week made the opening moves on a takeover of the bank. By the standards of some blow-out deals so far in 2021, this one is relatively small change. Carlyle will have to pay around £250m-£300m if it does take it over. The shares were up by 29% on the day the approach was announced – but still, not a huge business. Carlyle has until the start of next month to table a formal offer to shareholders. If Carlyle does end up buying it, shareholders will no doubt be relieved.
What’s the appeal?
The buy-out may, though, prove to be just the prelude for a really big deal: a private-equity takeover of one of the high street banks. There are three reasons they might be tempted. First, all the major high-street banks have massive and improving cash flow. We have seen that with their latest round of results. All of them are making big profits, and paying dividends again, and with the economy improving that will continue.
Second, there is plenty of scope for cost savings. All the major banks still have far too many branches for the level of demand, and the costs of keeping those open are huge. IT systems are antiquated and services are duplicated. It is hard to understand, for example, why they need their own networks of cash machines when so few of us use folding notes anymore.
Finally, there is lots of room for financial engineering, and that is what the buyout firms are really good at. Indeed, one of the main attractions of Metro might be that the private-equity giant can use its balance sheet to raise capital cheaply and then use Metro to make more expensive loans to consumers and small businesses. The margins on that will be very good, but they would be a lot better for one of the big four banks.
Of course there are plenty of obstacles. The Bank of England might say no. Private-equity firms are highly leveraged, and so are banks, so if you put the two together you get leverage squared, and that doesn’t sound like a recipe for financial stability. A takeover could be deemed too risky. And of course there may well be political opposition. All the people who didn’t like buy-out firms bidding for Morrisons will be even more outraged at the prospect of a well-known bank getting taken over. If it involves closing branches, as it almost certainly will, then there will be even more angry voices and the unions will complain about job cuts. An increasingly protectionist government might well block a deal.
The most tempting targets
That doesn’t mean there won’t be an attempt though. If there is, Lloyds would be by far the most tempting target. It is mainly focussed on the UK, its balance sheet has been repaired, and it has a solid customer base. NatWest would be next on the list if the government could be persuaded to sell its remaining 54% shareholding in one go. It has been largely cleaned up during more than a decade of effective state ownership.
Barclays is a lot more complex, because it has both a retail and a wholesale business, although it might well be possible to split it up, which would be an improvement anyway, and to put its retail business into a private-equity firm. HSBC would be a step too far. It is too big and too deeply involved in China.
If the Metro deal goes through over the next couple of months, don’t be surprised if the big buy-out firms move on from the appetiser to the main course.