Lloyds Banking Group PLC (LON:LLOY) is taking on a big credit card bill just ahead of Christmas with the £1.9bn cash purchase of MBNA’s UK card business from a unit of Bank of America Corp. (NYSE:BAC).
The part taxpayer-owned lender said it anticipates it will be able to deliver £100mln in annual cost synergies from the integration of MBNA within two years, around 30% of the total cost base for MBNA in 2015.
Lloyds said the acquisition will increase group revenue by £650mln per year and boost its net interest margin by around 10 basis points - one tenth of a percentage point. The MBNA business has around £7bln in gross assets on its books.
Antonio Horta-Orosio, the chief executive of Lloyds, said: “The MBNA brand and portfolio are a good fit with our existing card business and we will focus on providing its customers with excellent service and value.
He added: “Our low cost to income ratio and proven integration capabilities will deliver significant synergies and value to our shareholders.”
In early trading this morning, Lloyds shares gained 1.3%, or 0.8p at 63.35p.
Brokers cautious ....
In a note to clients, Shore Capital analyst Gary Greenwood said: "Overall, the anticipated financial performance and shareholder value creation that is expected to be generated by this transaction is impressive, in our view, and suggests a better use of capital than simply returning it to shareholders.
"That said, Lloyds will be broadly doubling up its exposure to credit cards at a particularly benign point in the bad debt cycle and ahead of a potential slow-down in the UK economy once the terms of the UK’s exit from the EU are reached."
And Neil Wilson, senior market analyst at ETX Capital, said: “The bank predicts earnings per share to rise by somewhere between 3% and 5% once the deal has been completed.
“But we have to be sceptical about a couple of elements. First, this big purchase could take a long time to pay off and by eating up so much cash we have to question whether Lloyds can increase dividends as much as hoped.”
He added: “The deal eats up 80 basis points of capital, which is about half of the bank’s annual net capital generation.
“The question we have to ask is whether this is good value for money at a time of great uncertainty in the market – defaults could rise if we start to get higher unemployment. Brexit makes the economic outlook very uncertain and Lloyds has just upped its exposure to UK consumer debt at potentially the worst moment.”
Competition concerns? ...
The deal is expected to complete by the end of the first half of 2017, subject to competition and regulatory approval.
Commentators have already expressed some concern that the acquisition will boost Lloyds' market share of the UK credit card market to more than 25%.
They noted, however, that as Barclays PLC (LON:BARC) already controls 28% of the market there should be no competition issue.
But they said the UK is far more concentrated than the US, where the biggest operator, Citi, has only an 8% market share.
Therefore it will be interesting to see whether the Financial Conduct Authority - which expressed concerns about the concentration of the credit card market a few months ago - could use its new competition powers to challenge a Lloyds-MBNA combination.
In its statement, Lloyds also made some comments on current trading, saying it continues to deliver “strong underlying and statutory performance with strong capital generation.”
As a result, Lloyds added, it “remains confident in delivering a progressive and sustainable ordinary dividend in 2016 and continues to target a pay-out ratio of at least 50 per cent of sustainable earnings over the medium term.”
Shore Capital's Greenwood said: "Although there is no change to guidance for a progressive ordinary dividend payment, this may colour management’s thinking towards special dividend payments for the current financial year as management may wish to retain additional capital."
Laith Khalaf, senior analyst, Hargreaves Lansdown said: “This does mean a special dividend for 2016 has become less likely, but at the same time the additional earnings from the credit card book bolster the dividend-paying prospects of the bank in years to come.”
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