Lloyds Banking Group struck a £1.9 billion deal yesterday to buy UK consumer credit card business MBNA from a Bank of America subsidiary in the taxpayer-backed lender’s first acquisition since the 2008 financial crisis.
Lloyds’ shares rose 2 per cent to 63.94p, but some City analysts expressed concerns that the move comes as the uncertain economic outlook could see consumer finances squeezed and defaults rise.
The lender said it was buying about £7bn of gross assets from FIA Jersey Holdings, which was “consistent with the group’s stated strategic ambitions of growing in consumer finance”, and boosts it in the UK prime credit card market.
It will increase the Bank of Scotland owner’s share in credit cards from about 15 per cent to about 26 per cent, and provides an annual boost to group revenues of about £650 million and to net interest margin of about 10 basis points.
Lloyds group chief executive António Horta-Osório described MBNA as a “good fit” with the bank’s current credit card business. He said: “The acquisition, funded through strong internal capital-generation, increases our participation in the expanding UK credit card market with a multi-brand strategy and advances our strategic aim to deliver sustainable growth as a UK-focused retail and commercial bank.”
He also flagged “significant synergies and value” being delivered to its shareholders, with cost savings of about £100m a year anticipated within two years, marking about 30 per cent of MBNA’s 2015 cost base. Once the deal receives the green light from regulators, it is expected to complete by the middle of 2017.
Shore Capital analyst Gary Greenwood said the financial performance and shareholder value creation expected to result from the transaction are “impressive, in our view, and suggest a better use of capital than simply returning it to shareholders”.
However, he added that Lloyds is bolstering its exposure to credit cards “at a particularly benign point in the bad debt cycle and ahead of a potential slowdown in the UK economy once the terms of the UK’s exit from the EU are reached”.
Also cautious given the economic outlook was Neil Wilson, senior market analyst at ETX Capital. He said: “The question we have to ask is whether this is good value for money at a time of great uncertainty in the market… Lloyds has just upped its exposure to UK consumer debt at potentially the worst moment.”
He added that recent figures from Lloyds “weren’t fabulous”, with the lender saying in October that underlying profits in the third quarter dropped 3 per cent year-on-year to £1.9bn.
It was recently revealed that the UK government cut its stake in the bank to less than 7 per cent, potentially paving the way for it to be returned to private hands within six months.