Shares in British challenger banks surged on Tuesday, buoyed by the news that Clydesdale Bank owner CYBG PLC (LON:CYBG) has made a £1.6bn all-share takeover offer for Richard Branson’s Virgin Money Holdings PLC (LON:VM.).
Metro Bank PLC (LON:MTRO) rose 2.7% to £33.34, while OneSavings Bank PLC (LON:OSB) climbed 4% to 411.2p. CYBG shares inched 0.8% higher to 321.4p, while Virgin Money jumped 8% to 337.2p.
READ: Virgin Money shares jump as it mulls £1.6bn offer from CYBG
Analysts said investors were betting on the possible CYBG-Virgin deal being the first in a wave of “inevitable consolidation” among the mid-tier challenger banks.
“The…CYBG/VM deal adds further fuel to the fire of the idea that the challenger banks will not be able to survive on their own despite several years of exciting growth prospects,” said Accendo Markets’ research analyst Artjom Hatsaturjants.
“High overheads to retain a banking license and the end of Bank of England’s bank funding schemes earlier this year mean that it may make sense for sector rivals to combine their resources to improve cost efficiency.
He then asked: “With UK economic growth disappointing as of late (i.e. soft inflation and wage growth, smaller GDP rise) and challenger banks’ further growth opportunities in doubt, is more industry consolidation inevitable?”
The likes of Virgin and CYBG have enjoyed several years of strong growth as they filled a hole in small business lending which the big boys pulled back from the wake of the financial crisis.
They have managed to take some business away from the Big Four – Barclays PLC (LON:BARC), Royal Bank of Scotland Group PLC (LON:RBS) and Lloyds Banking Group PLC (LON:LLOY) – but an increasing amount of red tape and the cost advantages enjoyed by the big boys has threatened their growth.
What would CYBG deal mean for Virgin’s digital plans?
To add to that, the rise of digital-only rivals such as Monzo and Atom has posed another threat as they’ve courted challenger banks’ customers without needing costly infrastructure.
Interestingly, Virgin had planned to launch its own digital bank later this year, although the future of that has now been thrown into doubt.
“It will be interesting to see what a successful bid would mean for Virgin Money’s plans to launch its own digital challenger bank, a proposition that was earmarked for testing later this year, offering current accounts and savings products,” said AJ Bell’s investment director Russ Mould.
“Perhaps that technology platform could be the ticket to help modernise CYBG.”