BREAKINGVIEWS-Barclays-Santander UK is a matter of when, and how

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Liam Proud

LONDON, Jan 20 (Reuters Breakingviews) - If Banco Santander’s SAN.MC Ana Botín wants to sell her British retail business, there’s an obvious buyer: Barclays BARC.L boss C. S. Venkatakrishnan. The biggest questions would be when the 42-billion-pound ($51 billion) UK bank decides to pounce – and whether its relatively new CEO, known as Venkat, can get his buyback-hungry investors on side.

The Spanish banking giant is reviewing its UK presence, Reuters reported on Sunday citing a person familiar with the matter. Santander, worth 75 billion euros ($77 billion), said in a statement that Britain was a core market. The group took full control of building society Abbey National in 2004, and current executive chair Ana ran the local division from 2010 to 2014.

Performance has often lagged larger rivals, however. In 2023, Santander UK managed a 14.4% return on tangible equity, compared with 16.5% on average for NatWest NWG.L and Lloyds Banking Group LLOY.L, using Visible Alpha data. Its performance took a dive last year after the bank set some money aside over an ongoing UK motor-finance regulatory saga.

Barclays looks like the most logical home for the business. Venkat wants to boost his UK division to reduce the group’s reliance on volatile trading and investment banking. He aims to get that latter unit, which investors tend to dislike, down to about 50% of risk-weighted assets by 2026, compared with 57% in September. Buying mortgage-heavy Santander UK would push that number down to 48% in a stroke, according to Breakingviews calculations. It also helps that Barclays’ stock has more than doubled over the last year, giving Venkat more firepower.

The price negotiations would keep advisers busy. On the average 1.2 times price-to-tangible-book-value of Lloyds and NatWest, Santander UK would be worth 13.6 billion pounds. Use the same duo’s 6.8 times 2026 price-earnings multiple, however, and the Spanish-owned unit’s equity value drops to 9.5 billion pounds, based on Visible Alpha-gathered estimates for its net income that year.

Assume Venkat paid the mid-point of those two numbers, or 11.6 billion pounds. He’d get 1.4 billion pounds of earnings from the acquired business in 2026, based on analyst forecasts, implying a handy 12% return on investment even before factoring in any cost savings.

One question is whether Botín believes she will get a better price by waiting, for example to let the dust settle on the motor-finance saga. Another issue is how Venkat funds any deal. Assume he would want to have a minimum 12.5% common equity Tier 1 ratio, and Barclays has about 4 billion pounds of excess equity, based on Breakingviews estimates, implying he might have to ask investors for most of the money in a rights issue.

That would mark an about-turn in the Barclays’ investment case. Venkat has promised to buy back shares, not issue more. His main job would therefore be to convince investors that any deal was worth the change of tune.

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CONTEXT NEWS

Banco Santander is reviewing its presence in Britain, Reuters reported on Jan. 19 citing a person familiar with the matter.

The process could result in different outcomes, including scaling back Santander's business in Britain, the report said citing the same person.

"The UK is a core market for Santander and this has not changed," Santander said in a statement on the same day.

Barclays has approached Santander in the past about a possible offer for its UK business, but it did not lead to anything, Reuters reported citing the same person familiar with the matter and a second person. The approach last year did not proceed because of a disagreement on price, the second person said, according to Reuters.

(Editing by George Hay and Streisand Neto)

((For previous columns by the author, Reuters customers can click on PROUD/
liam.proud@thomsonreuters.com))