Santander acquired TSB from Sabadell earlier this month following the partial sale of the Spanish lender’s polish subsidiary to Erste Group. The move reflects a broader trend among EU banks of strengthening core markets via acquisitions. Capital management tools including synthetic securitisations are being utilised to serve this strategy.
According to Scope ratings, the transaction will strengthen Santander’s market position in the highly profitable but competitive UK market. ‘’Santander UK’s organic growth and profitability have been slower compared to the group’s other core markets. The acquisition is small relative to the size of the group but material for Santander UK, since it will increase the size of its balance sheet by 20% to a pro-forma total assets of £300bn’’ says Scope ratings.
The rating agency continues: ‘’Further, the acquisition will increase the UK share in Santander’s global loan book to around 25% surpassing Spain (23% as of Q1 25). It also allows the group to reduce its exposure to the more volatile operations in emerging markets as mature markets will now make up more than half of the group’s net profits.’’
The transaction is in line with Santander’s strategy to strengthen its geographic diversification in core profitable markets. Given its proven track record, Santander aims to raise its return on equity in its UK operation in 2028 to 16% from 10%-12%.
Figure 1-Santander group’s loan portfolio including TSB/Q1 2025
Source: Scope ratings
Scope ratings notes: ‘’Santander group’s CET 1 ratio will not be materially impacted by the acquisition (12.9% in Q1 25) remaining at the upper range of the 12-13% guidance for 2025. The acquisition also confirms the group’s optimisation strategy of re-investing excess capital to expand businesses that generate profitability above the cost of capital.’’
The agency continues: ‘’While the acquisition will have a 50bps negative impact on CET1 capital at closing, this will be absorbed by the positive impact of above 100bps from the sale of 49% of its Polish operation to Erste Group, to be concluded later this year. A gain on capital could come from an increase in the organic capital generation from the stronger performance of the UK business with an expected 20% return on invested capital.’’
Besides such sales, Santander has also been actively using synthetic securitizations to manage its capital. Synthetic securitizations have acquired renewed relevance amid heightened M&A activity across Europe. Synthetic risk transfer technology can be utilized to bolster capital ratios for the larger balance sheets and RWAs that have to be managed as a result of the merger or acquisition or it can be used for defensive purposes. Indeed, given that SRTs boost capital ratios and bank valuations they can render any potential takeover more expensive for the acquirer.
Looking forward, Morningstar DBRS concludes: ‘’We estimate that the combined entity would stand as the UK’s fourth-largest banking group, with total assets of £306bn at the end of 2024. In addition, as communicated by the Group, Santander UK would become the third-largest bank in the country by personal current account balances and number four by mortgages. We also estimate that the 5m customers served by TSB would expand Santander UK’s client base to around 28m.’’
