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Capital Markets, Financial

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Categorized | Banks

Clydesdale eyes acquisitions to boost scale

Posted on November 22, 2016

Clydesdale and Yorkshire Banking Group has confirmed it is in “ongoing” talks to acquire Williams & Glyn from Royal Bank of Scotland with the aim of boosting scale to compete in the retail and small business banking market.

David Duffy, chief executive of the banking group, told the FT that he believes Clydesdale is “the only true SME and retail challenger” in the market, adding, “We want to grow that in scale … grow and compete”.

Williams & Glyn, which has both small business and retail customers, would significantly boost Clydesdale with a balance sheet of about £20bn, 300 branches, 250,000 small business customers and 1.8m retail customers.

The FT revealed last month that Clydesdale made a non-binding offer for Williams & Glyn. Santander is reportedly back at the negotiating table after pulling out of talks in September.

Mr Duffy, who would not be drawn on the Williams & Glyn bid specifically, said of acquisitions: “If it’s accretive to shareholder returns, we’ll consider it. If we’re in a transaction discussion, it’s because we’ve had discussions with the regulators, and financing is very straightforward.”

Clydesdale’s SME business was, before the financial crisis, twice the size it is at present. However, the bank had about £6bn of exposure to commercial real estate that “went wrong,” said Ian Smith, chief financial officer, which the lender subsequently offloaded.

RBS said earlier this year it would strike a “binding agreement” to sell Williams & Glyn by the end of 2016. It must fully divest the challenger bank by the end of next year, under EU rules for receiving a £45bn taxpayer bailout during the financial crisis.

Clydesdale reported its first annual pre-tax profit for five years on Tuesday, achieving £77m for the 12 months to the end of September, reversing a loss of £285m from the previous year. Clydesdale demerged from National Bank of Australia earlier this year and listed on the London Stock Exchange.

The bank’s profit was fuelled by a 6.5 per cent increase in mortgage lending, taking its mortgage book to £21.8bn. Lending to SMEs increased by 6.1 per cent to £6.4bn.

Clydesdale said that while lending remains sensitive to economic shocks, “broader based negative effects from Brexit have yet to be observed and prolonged economic stability underpinned by low interest rates and higher employment has supported customer confidence”.

Costs amounted to £729m, some 4 per cent ahead of guidance given at the time of the initial public offering. Clydesdale unveiled fresh cost-cutting measures in September, targeting more than £100m of cost reductions by the end of 2019.

It is aiming for a double digit return on equity by the end of 2019, a cost-income ratio of 55-58 per cent and loan growth at a mid-single digit percentage rate.

Gary Greenwood, an analyst at Shore Capital, said that he believes Clydesdale’s plans to deliver significant cost savings to boost the return on equity will be successful, “given much of it is within management’s control”.