Barclays Plc (BARC) agreed to buy ING Groep NV (INGA)’s money-losing British online bank, adding 1.5 million clients and improving funding for its consumer operations before the onset of tighter U.K. regulation.
Barclays, the second-largest U.K. bank by assets, will take over 10.9 billion pounds ($17.4 billion) in deposits and 5.6 billion pounds of mortgage loans from ING. The deal will immediately boost return on equity, the London-based lender said today. No purchase price was disclosed, though Amsterdam-based ING said the sale will lead to a transaction loss of about 320 million euros ($415.5 million) after tax.
The deal will bolster Barclays’ funding before the so- called Vickers rules that aim to erect fire-breaks around British banks’ consumer lending by 2019. The loan-to-deposit ratio at the bank’s U.K. consumer arm will fall to 103 percent from 108 percent as a result of the deal, according to Andrew Lim, a London-based analyst at Espirito Santo Investment Bank.
“The deal is more about the acquisition of a deposit base which reinforces the funding of the U.K. retail operations, which will subsequently be ring-fenced,” Lim, who recommends buying the shares, wrote in a note to clients. Otherwise, the deal is “an attractive bolt-on acquisition,” he said.
The acquisition is the first since Antony Jenkins, the former head of Barclays’s consumer bank, took over as chief executive officer in August from Robert Diamond, who built its investment bank. Diamond resigned in July after regulators fined Barclays 290 million pounds for manipulating interest rates.
ING was advised by Credit Suisse Group AG on the sale.
Barclays shares were little changed at 224.45 pence at 11 a.m. in London. The stock is up about 19 percent this year, outpacing the 13 percent gain by the Bloomberg Europe Banks and Financial Services Index, and has climbed 21 percent since Jenkins took over.
Barclays has built its consumer bank by buying discounted assets from rivals since the onset of the financial crisis. It acquired the banking arm of Edinburgh-based insurer Standard Life Plc for 226 million pounds in 2009. In March 2011, it acquired the credit-card assets of online lender Egg from Citigroup Inc.
“Barclays has established a strong track record for acquiring bolt-on businesses on the cheap and successfully integrating them,” Ian Gordon, a London-based analyst at Investec Plc who recommends buying the shares, wrote in a note to clients. “Barclays’s disciplined but committed approach to opportunities in the retail space is acting as a particularly useful source of sustainable value accretion.”
Some 750 employees will transfer from the Dutch bank and insurer as part of the deal. The business, which lost 89 million pounds before tax in 2011, will be folded into Barclays’s retail and business banking division.
ING Direct UK “is a good fit with Barclays’ existing U.K. retail banking business,” Ashok Vaswani, CEO of Barclays’s British retail unit, said in the statement.
ING said the transaction frees up 330 million euros in capital. The lender has been selling assets as it seeks to repay Dutch state aid received during the financial crisis. It said it was reviewing options for its U.K. online bank in August.
The Dutch company said the sale won’t affect its core Tier 1 capital ratio, a measure of financial strength. Barclays said the impact on its core Tier 1 ratio isn’t material.
ING “managed to exit a negative earnings drag for free, as the unit has reported over 200 million euros in losses on aggregate since 2003,” said Jan Willem Weidema, an Amsterdam- based analyst at ABN Amro Group NV who recommends buying the shares. “Still, some investors probably expected that the transaction would have a more positive impact on capital.”
The Dutch company started its U.K. online bank in 2003. In October 2008, days before its own bailout, it agreed to buy more than 3 billion pounds of retail deposits held by customers of the U.K. units of two failed Icelandic banks, Kaupthing Bank hf and Landsbanki Islands hf.
The company has struggled to make the unit profitable amid strong competition and savers willing to change banks in search for better interest rates. In the third quarter of 2007, the firm reported 5.1 billion euros in outflows after it didn’t follow Bank of England rate increases. Since then, the division has tried to attract less rate-sensitive customers.
“ING Direct UK operated in a very competitive market over the past years,” Chief Executive Officer Jan Hommen said in today’s statement.
ING shares rose 0.2 percent to 6.48 euros in Amsterdam, extending its gain so far this year to 17 percent.
“We believe that in order to make ING Direct UK profitable, ING would have had to make substantial investments to transform it into an internet bank with a full product range,” JPMorgan Chase & Co. analysts Michael Huttner and Ashik Musaddi said in a note today. That may clash with the firm’s current priorities of strengthening its capital buffers ahead of stricter regulatory demands and repaying state aid, they said.
In February, the biggest Dutch financial-services company sold its U.S. online bank to Capital One Financial Corp. for about $9 billion to meet European Union conditions for accepting state aid. ING received a 10 billion-euro bailout in 2008, and has repaid 7 billion euros, with 2 billion euros in interest and premiums. Hommen has said he plans to return another tranche before the end of this year.
Last month, ING sold its Canadian online bank to Bank of Nova Scotia. The lender’s online banking operations in Australia, Austria, France, Germany, Italy and Spain aren’t affected by today’s announcement, the firm said.