Lloyds Banking Group plc (LON:LLOY) is set to nip at the heels of rival Barclays plc (LON:BARC) in its share of the credit cards market following the acquisition of MBNA.
The £1.9bn takeover of the credit card business from Bank of America’s wholly-owned subsidiary FIA Jersey Holdings Limited, will bolster Lloyds' market share from 15% to 26%.
It would place Lloyds just behind Barclaycard, which has a 27% share of the UK's credit card market.
MBNA is one of the UK’s largest credit card issuers with about seven million customers, including its own brands and the official cards of major football clubs, including Arsenal and Liverpool. The business reported post-tax profits of £123mln in the first half of 2016.
MBNA is first acquisition by Lloyds since HBOS....
The deal to buy MBNA is the first acquisition by Lloyds since the financial crisis when the government had to rescue the bank by injecting £20.3bn to buy a 43% stake in 2009. The last acquisition was its disastrous purchase of HBOS in 2008.
Lloyds returned to private hands last month after the government completed the sale of its shares following a successful turnaround under chief executive Antonio Horta-Osorio. The government expects to generate a profit in excess of £900mln in the reprivatisation.
Horta-Osorio said the acquisition of MBNA would increase the bank’s “participation in the UK prime credit card market, where we were underrepresented, and strengthens our position as a UK focused retail and commercial bank”.
MBNA to boost earnings and revenue...
The deal is expected to lift revenue by about £650mln per year and increase the net interest margin by 10 basis points per year.
It will result in a 3% boost to statutory earnings per share in the first year and 5% the following year, Lloyds said.
Lloyds also said the underlying return on investment exceeds cost of equity in the first full year and will increase to about 17% in the second year after the acquisition.
“Our proven integration capabilities and low cost to income ratio will deliver significant synergies and value to our shareholders,” said Horta-Osorio.
Lloyds to achieve cost synergies on MBNA deal...
Lloyds is targeting cost savings of about £100mln per year within two years at MBNA, accounting for 30% of the division’s cost base. MBNA will remain as a challenger brand.
The bank first announced its intention to buy MBNA last December after fending off competition from US debt fund Ceberus.
At the time, investors feared that a special dividend was unlikely but at its full year results the bank delivered. It recommended a special dividend of 0.5p per share and raised its total ordinary dividend 13% to 2.55p from 2.25p as it reported its highest full year profit in a decade.
Lloyds focuses on UK market...
The MBNA transaction is part of Horta-Osorio’s strategy to focus on the UK market at a time when government is negotiating Britain’s exit from the European Union. Horta-Osorio has acknowledged that the bank’s performance is closely tied with the UK economy where 97% of its business its focused, having warned that Brexit poses a risk to the outlook.
However, Lloyds may benefit from the fact that the UK’s credit card binge is gathering pace. Figures from the Bank of England yesterday showed households are borrowing at the fastest rate in more than eleven years. The total amount owed on credit cards jumped by £600mln last month to a record £68.bn - or an average of more than £2,500 per household.