Financials Unshackled Issue 51 | Who will buy TSB? / Metro Bank Update / What now for AIB? / Other Developments

The independent voice on banking developments - No stockbroking, no politics, no nonsense!

The material below does NOT constitute investment research or advice - please scroll to the end of this publication for the full Disclaimer

Welcome to Financials Unshackled Issue 51! Similar to last week, this issue zones in on just three key focus topics in detail:

• Who is set to acquire TSB?

• Metro Bank key shareholder reportedly open to selling

• What will the future bring for AIB Group now that the State is off the register?

It’s a relatively quiet time of the year from a calendar perspective - nothing notable scheduled for the week ahead in a UK & Irish banking context so no calendar for the week ahead in this issue.

If you prefer an audio version of this article click ‘READ IN APP’ above and then press the PLAY button.

Photo by Jakob Owens on Unsplash

Select Key Focus Topics

Who is set to acquire TSB? Thoughts

The FT reported here on Monday that Sabadell, the Spanish parent of TSB Bank is working with advisers in relation to a potential disposal of TSB in an apparent bid to strengthen its defence in the context of BBVA’s hostile approach for Sabadell. The newspaper reported that interested parties have been given access to a data room containing due diligence materials. Sabadell noted in a statement on Monday evening that “preliminary nonbinding expressions of interest for the acquisition of the entire share capital of TSB Banking Group” have been received. The FT also reported that one person familiar with the process noted that a sale of TSB could generate between £1.7bn and £2bn for Sabadell.

What is TSB?

TSB is a UK mid-sized mainstream UK retail and business bank. It reported net loans of £36.3bn at end-FY24, predominantly mortgages (94%) and unsecured personal loans (4%) with the balance represented by retail credit card and business banking exposures. It is predominantly funded with deposits, reporting a loans-to-deposits ratio of 104% at end-FY24. Lending and deposit balances were broadly unchanged q/q at end-1Q25 (net loans +£0.1bn q/q to £36.4bn; deposits flat q/q at £35.1bn). TSB reported a RoTE of 10.6% for FY24, which has been on an improving trajectory - up from 8.9% in FY23, for example. Indeed, material operating cost reductions have been delivered by the management team - and this continues to be a focus as the 1Q25 update attests to. It is also notable that TSB reported a CET1 capital ratio of 15.4% at end-FY24 meaning there is significant excess capital in the business.

Mooted valuation range of £1.7-2bn

A readacross from peer listed UK bank valuations would suggest that a valuation range in the £1.7bn-2.0bn territory would be ambitious based on TSB’s end-FY24 tangible equity position of just over £2.0bn and its 10.6% FY24 RoTE print. But this does not take account of: i) Reported RoTE is weighed down by material surplus capital (average CET1 capital ratio of >16% in FY24, for example - using the opening and closing prints); and ii) Materially improving RoTE trend, significantly underpinned by improved structural hedge income as well as operating cost takeout (as we saw again in 1Q25). Indeed, Sabadell could strip excess capital out of the business pre-acquisition - say, down to a 13% CET1, thereby releasing in the region of £300m of equity which would presumably ‘bring the price down’ to c.£1.4-1.7bn. For context, though it’s not to be seen as a valuation view, taking the £2.0bn upper end of the mooted valuation range of £1.7-2.bn would drive c.250bps of CET1 capital ratio accretion for Sabadell on my estimates. Sensible then to consider bids for the business (binding offers are reported to be due on Friday 27th June) in the context of the hostile takeover battle (we will learn more on this wider BBVA / Sabadell bid battle next week). And, as far as I understand it, while Spanish takeover regulations do not permit the target to initiate actions like this during a hostile bid process, the key point here is that TSB received unsolicited interest from multiple parties as the FT article last Monday noted.

NatWest Group has reportedly ruled itself out

TSB is likely to be attractive to a number of suitors. While NatWest Group (NWG) had been seen as a key contender for the business, it emerged later in the week in media reports that NWG has ruled itself out of the bidding. While NWG has a stated ambition to expand its share of lending in mortgages and credit cards, its CEO has also consistently emphasised that it the bar is a very high one for any potential M&A deal. Additionally, a nuance here is that NWG has consistently - for years - made the point that it is under-represented in mortgages and credit cards relative to its primary depositor base. While the bank is clearly open to M&A at the right price and on the right terms, this point means that more work needs to be done organically to better penetrate its existing customer base. While an acquisition could build market share it is not necessarily an actual ‘fix’ in the context of the under-penetration point in and of itself. That’s not to say TSB wouldn’t have been desirable. Maybe NWG is saving itself for the potential prize that is Santander UK, careful not to take too much on at once (also a consideration for BARC one suspects) or risk that it wouldn’t get competition approval for a subsequent acquisition of Santander UK (that would be less of a concern for BARC given its stock share of UK mortgages is almost three percentage points below NWG’s).

What about Barclays?

Commentators have emphasised Barclays (BARC) as another potential bidder. This is entirely logical given BARC’s stated ambition to reduce the proportionality of Group RWAs attributable to its investment bank to 50% by end-FY26 (IB RWAs represented 56% of Group RWAs at end-1Q25) - with UK growth the key lever to achieving this target.

Santander is reportedly interested!

Interestingly, media reports during the week noted that Santander is one of the potential bidders for TSB - while that is at odds with the speculation around Santander potentially considering a disposal of Santander UK, there are three things to consider here as I see it: i) perhaps Santander is indeed committed to the UK as its Executive Chair has remarked; ii) somewhat - but not entirely - interrelated with i), a bid for TSB could be part of a wider strategic move on the part of Santander which could involve further M&A; and iii) without being cynical, adding to the competitive tension in a sale process for TSB could serve to benefit Santander in the event that it does want to exit Santander UK at some point and getting access to due diligence materials can be useful too I guess.

HSBC and Nationwide likely to look

Others who I see as likely potential contenders are HSBC (HSBA) and Nationwide Building Society. While Nationwide is laser-focused on integrating Virgin Money UK, its CEO, Debbie Crosbie, has been careful enough not to completely rule out further acquisitions either - and it is noteworthy that Crosbie was CEO of TSB in the not-too-distant past so would know the business intimately, including where the challenges lie and where more efficiencies could be achieved. Furthermore, those who know Crosbie would be aware of her first class operational strengths (having held the COO role at Virgin Money UK in the past as well as taking a ‘no nonsense’ approach at the helm of TSB and Nationwide), meaning lower-than-average execution risks potentially.

Lloyds very likely to be interested in my view

One further potential contender that is easy to dismiss but who should categorically not be ruled out in my view is Lloyds Banking Group (LLOY). LLOY divested of TSB a decade ago but that was a forced disposal following the government’s recapitalisation of the bank. Indeed, despite Santander’s alleged interest in TSB, the rumour mill is still swirling with respect to a potential disposal of Santander UK at some point. This might not be a realistic acquisition target for LLOY given the implications for its share of UK mortgage stock (would be nearing 30% post-acquisition on my calculations) and the CMA’s likely view on that - so, with M&A appetite and limited further options to acquire mainstream lenders (or mainstream loan portfolios), LLOY might be motivated to submit a strong bid. And, its stock share of UK mortgages would be just around the 21% mark post-acquisition, which could easily be palatable from a competition standpoint.

There is logic in Yorkshire Building Society’s reported interest too

Yorkshire Building Society (YBS) has also been mentioned as a potential bidder - it would be a large transaction for YBS to contemplate but not unprecedented in terms of building society transformational M&A given Coventry Building Society’s acquisition of Co-Op Bank and Nationwide’s acquisition of Virgin Money UK. YBS is larger than TSB, reporting £49.7bn of net loans at end-FY24 and, importantly, reported a strong surplus capital position at end-FY24 - with its CET1 capital ratio coming in at 18.1%. YBS uses standardised credit risk modelling so that’s a lot of capital - and, importantly, it is in the process of pursuing IRB accreditation). If it were running at, say, a CET1 capital ratio of just 13%, that would imply surplus capital of more than £1.1bn at end-FY24 (which would presumably be augmented significantly upon IRB accreditation, whenever that might come).

Not convinced others are in the fray - but could Pollen Street Capital / BC Partners swoop?

Finally, for what it’s worth I don’t see the likes of Chase UK, digital banks like Starling / Monzo / Revolut, Handelsbanken, State Bank of India, other building societies who are not mentioned above, or foreign players who don’t have a notable presence in UK retail banking move on TSB. However, one parting thought is whether Pollen Street Capital and BC Partners (see note on Metro Bank below) could make a move on TSB - in a bid to merge Shawbrook with a current account franchise and secure an IRB-accredited lender (the latter could have potential benefits for other parts of the Shawbrook business but that’s not entirely clear). While it seems that Pollen Street and BC Partners have been more focused on running the rule over Metro Bank (MTRO) and Starling Bank it is hardly unimaginable that they could take a look - while it would be a very big cheque to write for an acquisition of TSB (an acquisition of MTRO would likely be far less costly - and transaction structures that contemplate an evolution in the shareholder base of Marlin Bidco could be possibilities in the event of a tie-up with MTRO or Starling unlike the TSB situation) it’s certainly a possibility. And, factually, the mooted price tag for TSB implies a lower cost of equity than: i) what taking out MTRO at a premium to book value would imply; and ii) what a takeover of Starling at the valuation levels that its shareholders seem to think it’s worth would imply.

With binding offers understood to be due on Friday (Sabadell needs to run a compressed timetable to achieve an agreed transaction by mid-August) we’ll probably know more in the near future!

Metro Bank key shareholder reportedly open to selling

Reuters reported here on Friday evening that Jaime Gilinski Bacal, the majority shareholder (c.53%) in Metro Bank (MTRO), is “open to selling his majority stake” in the bank and “has received interest from investors”, according to two people with knowledge of the matter. The article further notes that “Another possibility for Gilinski could be a deal to grow Metro by merging it with another lender, one of the two people said”. This is a very interesting further development in the context of Pollen Street Capital’s reported interest in pursuing a possible acquisition of MTRO - as reported by Sky News on Saturday 14th June. It’s not entirely surprising I guess given Gilinski (via his Spaldy Investments vehicle) has already booked a substantial paper gain on his investment in MTRO - having acquired the lion’s share of his interest in the bank at a price of 30p per share in the 2023 capital raise. But, that said, he may well still sees the potential ‘sunlit uplands’ from here should MTRO management deliver on its commercial lending ambitions (and it appears to be progressing well thus far at least) and should official rates remain in accommodative territory.

It is also noteworthy that the Reuters report stated that “Pollen Street Capital and BC Partners together in recent weeks made an offer for Metro Bank, one of the people and a third one said. But they stopped their work after a disagreement on valuation and the board rejecting their offer, said the first person.”. This therefore appears, as expected, that the idea would be to combine MTRO with Shawbrook. But, it seems that both PE firms are interested - and it also indicates that work has been going on behind the scenes here for some time. That doesn’t surprise me. News reports like the one that Sky News published last week usually only float after there is a disagreement following significant engagement.

However, it is relevant to note that all breaking press on this thus far has only referenced the private equity firms’ interest rather than Shawbrook - which is different to other situations in the past (like Shawbrook’s reported interest in Starling bank in 2025 - and in Co-Op Bank and MTRO in 2023). Given the Sky News report of 14th June referenced Pollen Street Capital’s interest only (i.e., it didn’t mention BC Partners, which I flagged in Financials Unshackled Issue 50) and given that the Reuters report refers to the potential for Gilinski to grow MTRO “by merging it with another lender”, joining the dots here suggests to me that a transaction which would see MTRO’s shareholders (or some of them, including Gilinski at least) roll over equity into the acquiring vehicle could be a distinct, and perhaps the most likely, possibility here. It would reduce the size of the cheque that Shawbrook’s owners would have to write - and by preserving material future upside for Gilinski and other shareholders it could be the lubricant to fuel a deal at a price that Shawbrook’s owners can stomach. Lots of permutations here as always in M&A situations - but, as I wrote last week, Shawbrook’s owners will surely be keen to only pay a price that will facilitate strong future upside capture for their own account.

What will the future bring for AIB Group now that the State is off the register?

Last week marked a landmark week for AIB Group (AIBG), which saw the government exit the share register following a placing of its remaining shares (2.06% of the issued share capital) at a price of 694c per share - which the bank announced on the morning of Tuesday 17th June. AIBG further noted that the bank remains in discussion with the Department of Finance regarding the potential purchase of warrants issued to the Minister at the time of AIB's IPO in 2017 (notably bank management remarked, on the FY24 results call that, at that stage, an early retirement of the warrants would be likely to cost AIBG in the region of c.40bps of capital (i.e., €250m)). The Department of Finance published a press release later on Tuesday noting that the €500,000 salary cap applicable to both AIBG and PTSB employees has now been removed. However, the restriction on variable pay above €20,000 and the supertax of 89% on any Irish resident banker bonuses of >€20k remain in situ (I wrote in detail on banker pay and variable pay in particular in Financials Unshackled Issue 4: Irish Banker Pay Caps here on 12th September last - which, interestingly, is my least read Substack post!).

So, what do these developments mean for AIBG? I wrote a detailed opinion piece for the Business Post on this last week, which you can access here. In short, here are my thoughts:

• Given that Bank of Ireland (BIRG) pays a basic salary to its CEO, Myles O’Grady, and CFO, Mark Spain, of €950,000 and €600,000, respectively, I think we can expect a relatively swift move to bring the AIB CEO and CFO’s salaries up to at least those levels from their current €500,000 and €485,000. If I had to guess, AIBG will go a bit higher - but will stay just shy of the €1m mark for the CEO’s basic salary. It will be interesting to see, in time, who then decides to break the €1m barrier.

• Furthermore, BIRG, in 2023, introduced fixed share allowances of up to 50% of salary – which will reset to 100% of salary from July 1 for executive directors and a number of senior colleagues – and I would expect a similar move by AIB. From an investor perspective I think it is important to see the introduction of these FSAs sooner rather than later in a bid to achieve some re-alignment of management and shareholders’ interests given that the previous incentive for management to consistently drive share price appreciation to facilitate higher-priced share placings for the government has evaporated. That being said, given that these awards cannot be performance-linked, one cannot achieve perfect alignment unfortunately - as is the case for BIRG. Put simply, the lower the share price, the more shares management get.

• While the Minister’s decision not to lift the variable pay permissions may, at one level, serve to contain cost inflation, I suspect that now that the top brass will shortly be getting paid a lot better, lobbying efforts from other layers within AIB in a salary and, in due course, a fixed share allowance context, will undoubtedly grow. That could drive some cost inflation but I expect most lobbying efforts will be strongly resisted for now at least in view of AIBG’s hard target to keep costs <€2bn in FY26.

All in all, in my view the development is a positive one for existing investors and would-be investors who could not invest in a bank with government ownership given key executive retention risk is now significantly reduced. It is also positive for AIBG’s investability given some investors are precluded from investing in banks who have governments sitting on the share register. Finally, it also is likely to gradually lead to a different psychology amongst Board members with some potential softening in risk aversion over time - however, I suspect that will be at the margin given the conservative culture that has become entrenched over the post-financial crisis period. Indeed, AIBG has a well-established capital returns programme in place and I wouldn’t expect material excess capital redeployment to M&A, for instance, unless it were towards key strategic opportunities of a franchise-enhancing nature in a domestic market context or initiatives that could help strengthen its Climate Capital unit.

It is also a positive outcome for the Exchequer. While the State is unlikely to recoup all the monies invested in AIBG, it is in the black on its combined investments in AIBG, BIRG and PTSB (according to its own calculations rather than the C&AG’s figures, which show government is in the red). But that’s all just political optics and this newsletter really isn’t interested in that trash. The facts are that the State bailed out AIBG out of necessity and has got most of what it invested back. Rising interest rates being the main factor that enabled this outcome. To be fair, the Finance Ministers who have presided over the investments in AIBG over the years have always been humble and they all know that looking at it through a return on investment lens tells a different story. But, to be fair, the State didn’t invest in AIBG expecting to make a large profit on its investment.

Disclaimer

The contents of this newsletter and the materials above (“communication”) do NOT constitute investment advice or investment research and the author is not an investment advisor. All content in this communication and correspondence from its author is for informational and educational purposes only and is not in any circumstance, whether express or implied, intended to be investment advice, legal advice or advice of any other nature and should not be relied upon as such. Please carry out your own research and due diligence and take specific investment advice and relevant legal advice about your circumstances before taking any action.

Additionally, please note that while the author has taken due care to ensure the factual accuracy of all content within this publication, errors and omissions may arise. To the extent that the author becomes aware of any errors and/or omissions he will endeavour to amend the online publication without undue delay, which may, at the author’s discretion, include clarification / correction in relation to any such amendment.

Finally, for clarity purposes, communications from Seapoint Insights Limited (SeaPoint Insights) do NOT constitute investment advice or investment research or advice of any nature – and the company is not engaged in the provision of investment advice or investment research or advice of any nature.