Tuesday , December 7 2021

‘Terminated’ takeover of Metro Bank blow to idea of challenging old guard

That didn’t last long. Two weeks ago, Metro Bank said it was in discussions about a takeover approach from private equity giant Carlyle. Now, the talks are “terminated” for reasons neither side is prepared to state.

As it headed to the exit, Carlyle didn’t even offer a few polite words of encouragement for the Metro management crew trying to revitalise a lender whose go-go expansion plans were blown apart by a misreporting scandal in 2019. Metro’s shares fell 19%, returning to where they had stood at the start of the month.

The failure of the talks means we won’t hear Carlyle’s tentative original thinking. But the lack of action is another blow to the idea that once valuations of third-tier banks fall far enough – and Metro is valued at just 20% of book value – a big financial beast was bound to emerge to slam a few together to create a “challenger” bank actually capable of challenging the old guard.

Consolidation at the bottom end of the industry never seems to achieve momentum. Standard explanations are all plausible. Regulators’ capital demands can be heavier for small banks. Integrating IT systems is a costly hassle. And, even when you’ve achieved slightly greater size, attracting extra customers is hard because switching rates are still low.

Metro, perhaps, should be viewed as a special case. Aside from its calamitous recent history, it is a branch-dominated operation in a world shifting to digital banking. But the lack of competitive bite from the small end of the banking market ought to bother regulators more than it does, especially if money-making opportunities for retail lenders are about to multiply with rising interest rates.

A decade ago,after the financial crisis, regulatory reforms weren’t merely designed to make banks safer and more prudently managed. A secondary aim was also to promote competition. Newcomers did appear, and some – such as Starling, Revolut and Monzo – tick the box for customer-friendly tech. None, though, can be said to have seriously inconvenienced the big five or six in the core retail market of mortgages and personal lending. If consolidation doesn’t happen now, it’s hard to see how the position will change.

Royal Mail share price rises, along with popularity of parcels

You have to hand it to Daniel Křetínský, the Czech billionaire who has made a packet at Royal Mail: he spotted, as almost nobody else did in early- to mid-2020, that things couldn’t get much worse for the postal operator.

His early stake-building turned out to be perfectly timed. The bottom for the share price was 130p-ish in April last year, which was roughly the time the chair of Royal Mail, Keith Williams, was issuing thunderous warnings about how the UK business was losing £1m a day. Share price now: 475p, up 10% on Thursday’s half-year numbers that showed a group pre-tax profit of £315m.

Křetínský has maintained his silence about his investment rationale. Others speculated about a plan to liberate GLS, the international parcels operation, but the logic may have been simpler: lockdown would help Royal Mail by accelerating the growth of parcels and forcing a deal with unions on pay and productivity; and, if things got dicey, there was always a chance of relief from regulator Ofcom.

The first part has come to pass. Williams – after jettisoning the chief executive, Rico Black – got a deal with CWU and the messaging from the boardroom is now about how “improved colleague and trade union engagement” is allowing operational efficiencies to flow. The one-third jump in parcel volumes since the start of the pandemic (versus a one-fifth fall in letters) has been a neon-lit signal to all sides that change had to happen faster.

Křetínský may also have calculated that, once the whiff of growth and decent margins (5.8% in the first half) returns to the UK business, other financial metrics improve rapidly. The group now reckons GLS and the UK business can fund their capital expenditure from cashflow. Cue a £200m special dividend and a £200m share buyback.

That leaves regulation, where the universal service obligation requires Royal Mail to deliver to every address in the land six days a week at a uniform price. Reform moves at glacial pace, but we’re probably moving to a position where letters on Saturdays will be dropped in return for a seven-day promise on parcels. Since Royal Mail is trying to achieve the latter under its own steam anyway, it’s hard to see an obvious downside for the company.

The only proviso is that Ofcom should insist that the service standards improve as pandemic factors fade. Only 82.4% of first-class letters, versus a target of 93%, arrived on time in the last quarter. Not that Křetínský will be bothered, of course.

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