Is Sainsbury’s Bank Going to Be the First Major Acquisition of Natwest Since Its 2008 Bailout?

Summary

• NatWest Group PLC is planning for a potential takeover of Sainsbury’s Bank
• The last major deal by the Group was the takeover of ABN Amro in 2007 which was worth £49 billion, which had ultimately led to weakening of the banking group’s balance sheet
• The chief executive of J Sainsbury PLC is considering selling of the Sainsbury’s bank because the coronavirus pandemic has resulted into record low interest rates which has been posing a threat to the profitability of the bank

NatWest Group PLC (LON:NWG) is reportedly planning for a potential takeover of Sainsbury’s Bank. This will be NatWest’s first major acquisition since the 2008 Government bailout of £45 billion.

Previously known as Royal Bank of Scotland, the high street lender has reportedly approached the retailer seeking further information about its banking arm, which shows that NatWest has been taking interest in the business.

The last major deal by the Group was the takeover of ABN Amro in 2007 which was worth £49 billion, which had ultimately led to weakening of the banking group’s balance sheet. In 2018, NatWest had bought accounting software firm FreeAgent for £53 million. The taxpayer owns 62 per cent of NatWest Group’s stakes.

Stock Performance

The stocks of NatWest Group PLC were trading at GBX 147.40 on 13 November 2020, at 9:29 AM, 2.57 per cent lower from its previous close of GBX 143.80. NWG stocks had total market capitalisation (Mcap) of £17,438.98 million. 

Sainsbury’s Plan

The chief executive of J Sainsbury PLC (LON: SBRY) is considering to sell of the Sainsbury’s bank because the coronavirus pandemic has resulted into record low interest rates which has been posing a threat to the profitability of the bank. Mike Coupe’s successor Simon Roberts, the new CEO of Sainsbury since June 2020 has been suggested by its financial adviser UBS of a potential sale of the company’s banking arm.

The unit being considered for sale, includes products such as credit cards, insurance and mortgages, is undergoing a difficult period. A slowdown in demand for cashpoints and travel money services has triggered by the Covid-19 crisis, adding on to the already suffering bank which was under pressure due to cut-throat competition. Sainsbury’s Bank was successful in generating a pre-tax profit of £5 million for the year ending February 2020, after incurring a pre-tax loss of £34 million in FY2018-19. 

If this sale takes place in the coming months, it would be Mr Roberts’ first big move after taking over the position of chief executive. The supermarket chain had failed in securing a tie-up with Asda worth £7 billion.

At the briefing session of the half-year results, Simon Roberts had stated that the bank was attracting attention from potential buyers. He said that expressions of interest in the bank had been received which was not unusual. But there was no assurance as to that how far those discussions would work out. Also, he stressed that the company was very much focused on delivering its strategy of the five-year plan in the bank, which was rolled out at the capital markets day last September.

Financial highlights of Sainsbury’s Bank

On 5 November 2020, the company released its half-yearly report for the period ending 19 September 2020.

• The underlying operating loss incurred by the financial services was £55 million, reflecting the reduction in demand across consumer credit, and drop-in activity in Travel Money and ATMs because of conditions created by the pandemic.
• There was also a decline in the total income to £165 million year-on-year (H1 2019-20: £227 million), reflecting a contraction in balances due to lower consumer demand.
• The cost to income ratio increased by 700 bps to 77 per cent in (H1 2019-20: 70 per cent) due to a drop in income.
• NIM decreased by 40 basis points in to 3.1 per cent (H1 2019-20: 3.5 per cent) as compared to previous year.
• An increase of 1.4 per cent to 2.7 per cent (HY 2019-20: 1.3 per cent) was seen in bad debt expense as a percentage of lending, mainly to take into consideration the expected unemployment increases due to Covid-19.
• A plunge of 5 per cent to 2.0 million was recorded in the number of customers of the bank in comparison with last year.
• The Bank offered payment holidays, granting 61,000 holidays, out of which 84 per cent have matured.
• The bank demonstrated a strong capital position with an increase in the CET 1 capital ratio by 120 bps since August 2019 to 14.9 per cent (HY 2019-20: 13.7 per cent). There was a 16 per cent downfall in customer lending to £6.2 billion, reflecting a decline in demand for products including credit cards, loans and store cards. The customer deposits also saw a decrease of 14 per cent to £5.4 billion.
• Financial Services segment of the retailer made a good progress with transformation plan and streamlining product offering.  The Group expects to witness an increase in profit and returns by 50 per cent in its Financial Services business within a period of 5 years, despite the challenging environment. 

Stock Performance

The stocks of J Sainsbury PLC were trading at GBX 205.80 on 13 November 2020, at 9:22 AM, 1.68 per cent higher from its previous close of GBX 202.30. SBRY stocks had a total market capitalisation (Mcap) of £4,499.21 million.