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Treasury & Capital Markets / Viewpoint
UK supermarkets put their banks into the freezer compartment
Retailers in the UK leaving banking services to traditional financial institutions
Keith Mullin 13 Feb 2024
Keith Mullin
Keith Mullin

How important do British consumers think it is to conduct their banking and financial services business with the same people they buy frozen peas from? Not very, it would appear, because Tesco and Sainsbury’s, the UK two largest supermarket groups – combined revenues of almost £48billion (US$61 billion) in the fiscal half-year to September 2023 – announced within days of each other that they are ditching their go-it-alone banking strategies.

The concept of further monetising food shoppers by cross-selling them financial products and services might be sound on paper. But after years of effort building expensive banking brands with an eye on disrupting the UK retail and consumer banking market, UK supermarkets have come to the conclusion that banking is better done by … well … banks. And that offering banking services on a white-label basis backed by the know-how and the physical and digital operating infrastructures of financial institutions is the way to go.

Barclays’ announcement on February 9th, following months of speculation, that is acquiring Tesco Bank for £600 million will see the two parties enter a 10-year strategic partnership under which Barclays will white-label Tesco-branded credit cards, unsecured personal loans and deposits that will land the supermarket group a royalty payment of around £50 million a year. Not bad.

Tesco Bank was established in 1997 as 50-50 joint venture with the Royal Bank of Scotland. The supermarket acquired RBS’s stake in 2008. (RBS had other issues to deal with at that time, like being nationalised in a £45.8 billion government bail-out as the Global Financial Crisis was unfolding). Tesco began its slow withdrawal from banking in 2019. It sold its mortgage portfolio in that year to Lloyds Banking Group for £3.8 billion, having already stopped new mortgage lending, and also stopped accepting new personal current accounts. All personal current accounts were closed in 2021.

The sale to Barclays involves £4.2 billion of credit card receivables, £4.1 billion of unsecured personal loans and roughly £6.7 billion in customer deposits, alongside 2,800 staff and the bank’s operating infrastructure.

Food First

The Tesco news came just weeks after Sainsbury’s Bank said it had completed a strategic review of its financial services division. Conclusion? Sainsbury’s too is getting out to focus on its Food First strategy. “Financial services products that we continue to offer in the future will be provided by dedicated financial services providers through a distributed model. Over time, this will result in a phased withdrawal from our core banking business,” the firm said in a statement.”

At the Sainsbury’s strategy update on February 7th, just two days before the Tesco/Barclays announcement, Sainsbury’s CEO Simon Roberts said withdrawal means “selling, entering into partnerships with third parties, or running off portfolios”. Speculation is mounting as to who might bid for the business.

There had been chatter about the future of Sainsbury’s Bank for years. Management had made little secret of the fact it was not necessarily wedded to the banking business. NatWest reportedly made enquiries about a takeover in 2020. Sainsbury’s Bank was established in the same year as Tesco Bank, 1997, as a joint venture with Bank of Scotland before the supermarket took full ownership in 2014. In August 2023, it sold its £479m mortgage portfolio to The Co-Operative Bank.

Among other leading UK retailers, Marks and Spencer has long since given up on running its own bank: M&S Bank has been a subsidiary of HSBC for years.

The John Lewis Partnership (which operates the John Lewis retail stores and supermarket chain Waitrose) has a partnership with consumer finance specialty provider NewDay (owned by private equity firms Cinven and CVC).

Supermarket group Asda’s credit card is provided by app-based fintech Jaja Finance (majority owned by private equity firms KKR and TDR Capital). Jaja made its play for UK branded credit cards in 2019 when it acquired the Bank of Ireland’s UK credit card portfolio for £530 million. As well as Asda, Jaja white labels UK motoring association The AA’s credit card (formerly The Automobile Association). Meanwhile, the UK Post Office’s credit card is operated by US-based bank holding company Capital One.

And for something completely different …

Taking a step back to the Co-Op acquisition of Sainsbury’s mortgage portfolio and at the risk of going off on a tangent, that purchase was notable for another reason: it was the Co-Op Bank’s first portfolio acquisition in more than a decade.

Particularly notable because Co-Op initiated its own a strategic review in 2023, having been perennially subject to takeover rumours since its rescue by a syndicate of hedge funds and private equity firms in 2017. At the time of the Sainsbury’s mortgage purchase, Co-Op Bank CEO Nick Slape said the sale “highlights the bank’s turnaround and focus on both organic and inorganic opportunities”.

Well, the opportunities the bank is pursuing are clearly inorganic: soon after buying Sainsbury’s mortgages, the Co-Operative Bank entered into exclusive merger negotiations with Coventry Building Society, the UK’s third largest mutual financial institution, in December 2023. The syndicate that owns Co-Op Bank – Anchorage Capital, Silver Point Capital, Goldentree, Cyrus Capital Partners, Invesco, J.C. Flowers, and Bain Capital – is presumably keen to exit money-good.

The last-ditch rescue was mounted because of the Co-Op Bank’s catastrophic acquisition of the Britannia Building Society in the depths of the Global Financial Crisis in 2009, when Britannia’s bad commercial real estate loans and sub-prime residential mortgages almost sank its acquiror and ended up putting it through years of penury and hard slog. If Coventry and Co-Op end up doing a deal, the latter will return to the mutual status under which it was founded in 1872. 

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