Size always matters as challenger banks learn painful lesson

The new banks were expected to take on the big leaders, but the expectations were not met.

The Clydesdale head, David Duffy, gathered a meeting in the “Cheesegrater” skyscraper to talk to the most professional fund managers. He wanted to share his thoughts on the plan to ease the bank’s fate within the economic storm.

The plan included shutting numbers of the bank’s branches, which made the atmosphere of the meeting rather gloomy. According to the speeches from the meeting, the plan is necessary, as there’s a great threat that the bank’s profits will drop dramatically. Within the factors for that there are close to the bottom line interest rates, as well as the steep economic fall connected to Brexit.

The troubles are described writ large nowadays, as the expectations connected to the upstate banks were not met. Clydesdale, along with Virgin Money, Aldermore, and Metro Bank, were perceived as the hope for starting a competition with the big banks that rule the financial world of the country nowadays.

But those hopes have dimmed. The painful reality is that many of the challengers are simply too small to offer robust competition to the big beasts. The Brexit vote has only added to their pain.

Since the June referendum, foreign investors have made it plain that they view the challengers as too risky, given the uncertainties hanging over the economy. The share prices of challengers have plummeted by 20%-30%. With no panacea in sight, the pressure for consolidation is growing.

“The market is changing and interest rates are putting pressure on businesses. Everyone will be looking to see who will survive,” said Duffy late last week. “Private equity players could take banks private. We will certainly be open-minded about consolidation as long as it adds more value than our current strategy.”

Clydesdale is ready to mobilise but it will have to compete with Santander. City sources say the two are about to lock horns in a battle for Royal Bank of Scotland’s (RBS) Williams & Glyn business, which the lender is being forced to sell by the European Commission after its 2008 state bailout.

The prize is 300 branches and nearly 2m customers. The deadline is the end of next year. The troubled Co-op Bank is also likely to be swallowed up.

Secure Trust, led by Paul Lynam, is poised for a “buyout binge”. The idea is that, with a bulging balance sheet, the smaller banks can more easily chip away at their larger rivals. But finding banks that are willing to sell at rock-bottom prices might be a step too far.