Bank acquisition in troubled times may not be good idea

CYBG said it has held talks with RBS, but stopped short of disclosing the terms of the offer.

Some CYBG shareholders will be hoping they can get their hands on Williams & Glyn at a bargain price as RBS must offload the branches by the end of next year as part of EU conditions linked to its £45bn bailout at the height of the financial crisis.

Analysts believe that RBS will get less than the £1.9bn it wants for Williams & Glyn after previous failed attempts to sell the branches. Analyst Gary Greenwood at Shore Capital said that on a standalone basis, neither Yorkshire/Clydesdale or Williams & Glyn appear capable of earning a return above their cost of equity any time soon.

However, by combining two broadly similar-sized businesses (with a combined loan book and deposit base of £50bn), a much larger challenger bank would be created which will have the added benefits of greater scale, a national branch network (almost 600 branches) and a broader product set (including a much larger exposure to SME).

However, Mr Greenwood raised some very important questions as to how Yorkshire Bank and sister Clydesdale will fund the deal given that parent CYBG currently has limited surplus capital at the moment.

“Such a transaction is therefore likely to be complicated and hence we would be inclined to be cautious from the perspective of CYBG investors, although noting there could be significant cost synergies from combining two domestic UK banking businesses. That said, without any details around deal structure or price it is difficult to make a judgement as to whether this is ultimately good or bad news for CYBG shareholders at present,” he said.

This could be seen as an ambitious move by Yorkshire Bank’s owners that show it is determined to grow the business after years of branch closures and job losses by former owner National Australia Bank.

Yet just last month Yorkshire/ Clydesdale announced plans to close a further 50 branches which could involve making hundreds of people redundant as it invests £350m on online and technology.

The banks’ chief executive David Duffy said it is too early to say how many jobs will go, but confirmed the branch network will be reduced from 248 to less than 200 as it reacts to an increase in demand for online banking.

“We are taking out branches where there isn’t business. We are opening branches in Liverpool, Birmingham, Manchester, Edinburgh and London,” he said last month.

CYBG’s latest cost-cutting drive comes after it announced plans to shut 26 branches nationwide and reduce its workforce, with nearly 500 jobs axed over the past 18 months. While investors weigh up the merits of a Williams & Glyn takeover, a deal will be cold comfort to the hundreds of Yorkshire/Clydesdale workers who are losing their jobs.

There is also an argument that CYBG needs to grow the bottom line before it looks to expand. A year ago Mr Duffy told The Yorkshire Post he would not rule out mergers and acquisitions activity in the future but said Yorkshire and Clydesdale would need to “deliver a track record to earn the right to have any of those conversations”.

He added that acquisitions would involve fundraising and this would need investor confidence. Yet hang on a second. The group now expects growth of around 5 per cent by 2019, against previous expectations for 8 per cent by 2020, and it reported a 4.2 per cent fall in underlying earnings to £107m in the six months to March 31.

How does this inspire investor confidence? Especially at a time when the BBA is saying that bank bosses have their hands “poised quivering over the relocate button” as Britain embarks on its exit from the EU.

These are troubling times for UK banks. Maybe Yorkshire and Clydesdale need to get their house in order before they go on a spending spree.