NatWest's acquisition of Sainsbury's Bank supports strategy, profits

NatWest Group PLC's acquisition of the core banking business of UK supermarket chain J Sainsbury PLC underpins group strategy and profits, according to analysts.

The UK's fourth-largest lender is taking over £2.5 billion of gross customer assets and £2.6 billion of deposits from Sainsbury's Bank PLC and adding roughly 1 million new customer accounts.

While small, the acquisition is "a good strategic fit" for NatWest as it complements organic growth in its unsecured lending business, where it is underweight, BofA analysts said in a June 21 note. The customer assets being acquired from Sainsbury's Bank account for less than 1% of NatWest's retail bank loan book but add 16% to its unsecured loans and credit cards, the analysts said.

Boost to unsecured portfolio

NatWest will take over £1.4 billion of unsecured personal loans and £1.1 billion of credit card balances.

The acquisition "is a meaningful boost" to the group's unsecured portfolio, which is underweight compared to its mortgage and deposit portfolios and "notably smaller" than the unsecured books of peers Lloyds Banking Group PLC and Barclays PLC, S&P Global Ratings analysts said in a June 20 bulletin. NatWest had £15.8 billion of unsecured balances across its retail and private bank as of the first quarter of 2024, compared to £23 billion of retail unsecured lending at Lloyds and £40 billion of UK and US unsecured balances at Barclays, Ratings estimates show.

NatWest's addition of Sainsbury's Bank customer assets in this segment "will propel an already-solidly growing book and strong returns in its retail banking division," the Ratings analysts said. With a 16.5% return on tangible equity (ROTE) in the first quarter of 2024, the retail banking business is "performing strongly" and is "likely to be a key contributor to the group's performance targets," the analysts said.

NatWest said the Sainsbury's deal will be accretive to group earnings per share and ROTE upon its completion, expected March 31, 2025.

Capital impact

The negative effect of 20 basis points on NatWest's common equity Tier 1 (CET1) ratio resulting from the acquisition would not have a material impact on group capital distributions, according to the BofA analysts. The estimated £300 million hit to CET1 capital is expected to be offset "fairly quickly" by incremental earnings, they said.

The impact is "manageable" given NatWest's good capitalization with the current CET1 ratio already within its 2024 target range of 13% to 14% in 2024, the Ratings analysts said.

NatWest posted a first-quarter CET1 ratio of 13.50% after deducting £367 million for future ordinary dividends. The group's total shareholder distributions for 2023 amount to £3.6 billion, including £1.5 billion in dividends, £800 million in on-market buybacks and another £1.3 billion repurchased from the UK government, which is offloading its stake in NatWest.

NatWest's acquisition of Sainsbury's Bank follows a similar deal announced by Barclays in February for the acquisition of most of Tesco Personal Finance PLC's retail bank assets from supermarket chain Tesco PLC. Coventry Building Society also signed a deal to buy The Co-operative Bank PLC in May.