What a Spanish bank mega-deal means for TSB

A hostile takeover bid for Spanish lender Sabadell by its rival BBVA last week has reignited a debate about the future of the UK’s TSB bank, putting a possible sale back on the agenda.

Like other midsize UK banks, such as Virgin Money and Metro Bank, Sabadell-owned TSB has struggled to compete with larger rivals. Analysts and bankers say keeping TSB, which has 5mn customers and a £36bn loan book, would make little sense for Sabadell’s suitor in the long term.

“I don’t know what it would give BBVA. It’s not the best system, not the best brand, not the best franchise,” said Edward Firth, an analyst at boutique investment bank KBW.

Strict regulation and slow growth have also made UK banks less attractive for international investors and overseas owners.

Although BBVA’s bid could be rejected by Sabadell shareholders, it has increased pressure on the smaller bank to prove to investors that its current strategy is working and that it makes sense for a Spain-focused bank to hold on to a UK lender.

“A sale could be well-received,” said Barclays analyst Cecilia Romero Reyes, adding that if it were valued at the same multiple as Virgin Money — which was recently bought by Nationwide Building Society in a £2.9bn deal — BBVA could improve its Sabadell offer and recoup the funds by selling TSB. Others note that BBVA already has a significant cash pile that it could use to up its offer.

BBVA has not talked about TSB in the same glowing terms it has used about Sabadell’s Spanish business. Chief executive Onur Genç said it was “too early” to say whether it would keep TSB if it did manage to buy Sabadell.

“We only have an outside-in perspective,” said Genç. “[Sabadell is] a franchise that we admire, that we like, and TSB is part of that but the decision will be taken in due time.”

Founded as the Trustee Savings Banks in 1810, TSB merged with Lloyds Banking Group in 1995 before it was carved out from the business as a consequence of a UK government bailout during the financial crisis.

It subsequently floated on the London Stock Exchange in 2014, with the ambition of breaking the big UK high street banks’ grip on the retail market and capitalising on consumer distrust in the aftermath of the financial crisis.

It made a point of scrapping internal sales targets and offered customers higher interest rates “without the funny stuff”, saying it would “refuse to gamble your money away in overseas speculations”.

Less than a year later it was bought by Sabadell in a £1.7bn deal

In due course, it dropped some of its flagship products, including a 5 per cent yielding current account launched at a time of ultra-low interest rates.

Its image was also hurt by a disastrous IT project to move millions of customers away from Lloyds’ legacy infrastructure to Sabadell systems. The botched migration left 2mn customers temporarily locked out of their accounts, costing the bank a £49mn fine and former chief executive Paul Pester his job.

Last year, TSB ranked 13th of 15 for service quality in an industry-wide customer survey by Ipsos. This month it said it would close 36 of its 200 branches and cut 250 jobs from a total of more than 5,000.

But a turnaround led by chief executive Debbie Crosbie, who left in 2022 to run Nationwide, helped make TSB into an asset for Sabadell: last year it was responsible of some 14 per cent of its Spanish owner’s profits.

Another attractive feature of the UK bank in the near-term is a structural hedge it has against interest rate moves. Analysts expect this to be lucrative for TSB over the next few years as rates fall.

Selling the bank now would also be a lengthy process with strict due diligence and compliance checks and the risk of more disruption from IT system changes. It would also expose its owners to the low valuations that have been a problem for the UK retail banking sector.

Possible suitors could include Nationwide, which is in expansion mode. However, it already has Virgin Money to integrate and this is likely to take several years.

Metro Bank, which was last year rescued by Colombian billionaire Jaime Gilinski could also swoop in. Gilinksi, who last year told the Financial Times he could use Metro as a vehicle to buy more banks, became Sabadell’s largest shareholder in 2013 before cutting his stake three years later. The two retail banks are seen as a strategic fit because Metro’s branches are concentrated in and around London, while TSB has few in the capital.

Additional reporting by Owen Walker in London

This article has been corrected to make clear that TSB has 5mn customers, not 2mn as previously stated