UK Bank Merger Fallout Sparks Speculation

Although Santander rejected NatWest's proposal to acquire its UK retail operations, the move has sparked speculation among investors that further mergers and takeovers could be in store for the British banking sector.

Strategic Move or Insufficient Offer?

Earlier this month, and following a similar proposal by Barclays beforehand, press reports circulated that to buy up its UK retail operations. Neither party confirmed a deal, with the press reporting that the offer was rejected due to an inadequate price. Santander noted that its UK operations were not for sale in the wake of the reports of the offer and reiterated that the UK remains a "core market" for the bank.

However, earlier this year, it was reported that due to lower returns and legal challenges, with the intention of refocusing on more lucrative operations in the Americas. At the time, Santander also denied that its UK arm was for sale. However, the two offers suggest that at least some rival banks believe an exit might be possible, and the refusal might have been due to the prices being offered rather than a commitment to the retail market in the UK. Meanwhile, all reports indicate that Santander intends to keep its UK investment banking operations. Yet, the bank is still in the process of trimming its UK workforce in an effort to improve returns from the unit.

Merger Wave, Attractive Valuations?

The news comes amid consolidation in the UK banking sector as it finally regains its footing after significant government support during the Great Financial Crisis (GFC) nearly two decades ago. NatWest had 84% of its equity held by the state at one point, but now. This has sparked speculation that NatWest has the resources and interest to acquire other operations.

Analysts expect the overall rate and this year, as higher interest rates have swollen the coffers of larger entities, and the expectation of monetary easing makes large capital investments attractive. NatWest has already moved to acquire Sainsbury's banking arm, while Nationwide and Virgin Money are finalising their combination process. UK banks have been in the process of shedding workers to cut costs, and mergers offer the additional advantage of scale. Hence, it's probably just a matter of time before another potential large merger deal is reported in the press.

NatWest Pennant Projection Approaching

With NatWest upbeat and currently trading around 520 pence, the measured move projection of the 6-year-long pennant pattern suggests a potential upside to 550 as prices accelerate to nearly 15-year highs. However, extending equally to the pennant's high after several years might trigger profit-taking, while a break above 550 could open the door to 600 and beyond. Meanwhile, a pullback could see the stock decline to 485, with a break below 420 potentially paving the way for 400 and even lower.

Source: SpreadEX / Natwest Group

Key Takeaways

The NatWest-Santander merger fallout has sparked speculation about potential consolidation in the British banking sector, with analysts still anticipating an increase in M&A activity as higher interest rates support the larger players and the prospect of monetary easing makes capital investments more attractive. With the UK government set to exit its holdings in NatWest, the bank appears well-positioned to pursue further acquisitions.