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Fresh wave of mergers ahead for small lenders, analyst predicts

CapitalA fresh wave of mergers between small lenders may be on the horizon this year, an analyst from Cavendish Corporate Finance has forecast.

Earlier today news broke that Clydesdale and Yorkshire Banks’ parent CYBG had put in a preliminary bid for Virgin Money, valuing Richard Branson’s lender at £1.6bn.

Commenting on the move, Cavendish head of financial services Duncan Chandler says that this could be the start of a new phase of merger and acquisition activity among smaller lenders that no longer enjoying as much support from the Bank of England.

He says: “Funding schemes designed to increase competition in the banking sector have encouraged a rise in new challenger banks and specialist lenders since the 2007 financial crisis.

“However, these banks now face tougher times given the recent slowdown in economic growth and the Bank of England’s decision earlier this year to stop its cheap funding schemes, which were designed to encourage lending growth.”

Chandler says that challenger banks have suffered most from the evaporation of cheap funding as they cannot draw upon the huge retail deposit base that high street names can leverage.

He points to rating agency Moody’s estimate that banks would have to pay more than £800m in extra interest costs as a result of losing this funding.

Chandler adds: “Competition from larger banking groups such as HSBC, which is expanding rapidly in the UK mortgage market makes it harder to charge borrowers more, putting further pressure on margins.

“We expect a fresh wave of consolidation among smaller lenders to arise as economic uncertainty continues and cost pressures rise and this should be a key trend in financial services M&A over the rest of this year.”

Turning to the latest bid from CYBG he says: “Virgin Money, which warned in November that competitive pressure in the mortgage market was squeezing its lending margins is perfectly positioned to benefit from this merger.

“It would gain access to a significant number of current accounts and a wealth of business customers.

“The acquisition also provides CYBG with exposure to the highly lucrative credit card sector while also giving it more scale in the mortgage market.”

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