TSB owners snub Co-op takeover move as sector prospects recover

The Manchester-based lender yesterday confirmed reports that it had sent a letter to TSB owner Banco de Sabadell expressing interest in a purchase that would have created a business with eight million customers and about 900 branches. However, the Co-op said in a statement that “no discussions in relation to a potential transaction are currently taking place” with Spanish-headquartered Sabadell.

Nick Slape, who a year ago became the Co-op’s sixth chief executive in 10 years, added: “Our unique brand, underpinned by co-operative values and ethics and the significant progress we have made in returning our bank to profitability, is a testament to the hard work of our colleagues and the loyalty of our customers – which we continue to place at the heart of all our decisions.”

The bank – which is no longer linked with the Co-operative Group, and is recovering from its own difficulties of the past decade – was reportedly prepared to offer in excess of £1 billion for TSB, which was part of Lloyds Banking Group until 2014 when it was spun off as an independent bank. It was bought by Sabadell the following year in a £1.7bn deal.

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Laith Khalaf, head of investment analysis at AJ Bell, noted that record-low interest rates have weighed on profits throughout the banking sector: “If you look across the piece, bank shares are not valued particularly highly at the moment, which means it is a good time to be a buyer, but not a seller,” he said.

However, surging inflation is raising expectations that interest rates could soon be headed higher. If the economy otherwise remains on a stable footing, banking shares could regain their allure among investors.

Mr Khalaf said that under these circumstances, the board of Sabadell may have concluded that the best course of action was to wait for these constructive trends to take hold.

“That will be a positive tailwind for banking shares, though the market does not so far seem to be responding to it,” he said.

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A strategic review announced last year by Sabadell triggered rumours that TSB might be up for sale as its parent group said it intended to focus on its domestic business in Spain. But upon concluding its review in March, Sabadell said it had no intention of disposing of its UK operation in the near future.

Responding to reports this past weekend about the approach by the Co-op, Sabadell said “this is not a transaction that we wish to explore at this moment as we have previously expressed publicly”.

This is the second time the Co-op Bank has expressed an interest in buying TSB. The first approach came in 2013 when it was still part of the Co-op Group, but this had to be abandoned after a £1.5bn hole was uncovered in the bank’s balance sheet, prompting a bail-out that led to the change of ownership into the hands of hedge funds and other investors.

HSBC smashed profit expectations for the third quarter

The Co-op Bank returned to profitability in the first half of this year, posting a pre-tax figure of £21.4m against a loss of £44.6m during the first six months of 2020.

The potential for improving fortunes across the banking sector were further underlined yesterday by third quarter results from HSBC, with a 74 per cent increase in profits allowing the global giant to release hundreds of millions of pounds originally set aside to cushion the blow from a potential surge in loan repayment defaults by its customers.

Pre-tax profits of £3.9bn during the three months to September 30 were far ahead of market expectations. The release of some £509m of reserves built up during the pandemic allowed HSBC to announce a share buyback programme that will return about £1.45bn to investors.