Unlike the Spanish Armada, which was ultimately doomed to fail, it looks as if Santander will join its fellow countrymen in another victory. The deal prices A&L ridiculously cheaply but there are no alternative bids on the table. The only banks potentially capable of a bid of their own Lloyds TSB and National Australia Bank (owner of Yorkshire Bank and Clydesdale) have remained quiet.
Santander has an enviably strong financial position, with no exposure to sub-prime mortgages, focusing instead on its core retail banking business. This strategy has enabled it to thrive, taking over Abbey in 2004. Despite the bargain price for A&L, the deal is a welcome vote of confidence in the UK’s battered financial system. A takeover will help stabilise one of our weaker lenders.
Santander says it will inject a further £1bn of capital into A&L to cover restructuring costs, further write-downs on the portfolio of treasury assets and the possibility of higher loan losses on its mortgage portfolio. It does not sound as if it is buying a bank on the top of its game.
The alternative to the takeover another UK bank in trouble does not bear thinking about. Instead, chairman Emilio Botin has achieved a fait accompli over a weekend of negotiations. There were rumours that A&L was in trouble but the deal is practically done with little apparent fuss or fanfare. This offer provides certainty for a weak bank in what are uncertain times.
What are the practicalities for the mortgage market? There will be less choice for borrowers as there will be one less lender. A&L is a top 10 lender known for flexible products but a merged Abbey/A&L will be a force to be reckoned with. It could end up with a combined 12.7 per cent share of the UK mortgage market, making it the second biggest lender. This could make it a real threat to HBOS which has not had a serious challenge to its dominant position for a long time.
With stronger competition, consumers should ultimately benefit. What they may have lost from having one fewer lender to choose from, they should gain in better pricing. It may even help the market gain a semblance of normality quicker than it would have done if HBOS is forced to compete to retain its market share.
Whatever is thought of this particular deal, it is far better than the alternative, which could have been another UK bank in trouble. Santander has a good track record as Abbey was also in a vulnerable state when it was acquired for £9.5bn. Now, it is one of the few lenders which are willing and able to lend during this liquidity squeeze. Santander has proven that it can integrate a UK bank into the fold with minimal fuss and is likely to do the same with A&L.
It would be amazing if this were to be the last of it. Consolidation is likely to be a feature of the UK banking sector in coming months. Other vulnerable banks will be snared by stronger rivals. Post-credit crunch, the banking scene is likely to look very different but I would argue that it will be stronger and better positioned to thrive.
Mark Harris is managing director at Savills Private Finance