Nearly a decade after being bailed out by the UK taxpayer, it looks as if the Lloyds (LSE: LLOY) recovery is finally complete.
Indeed, today the bank announced it has agreed to acquire the MBNA UK credit card business from a unit of Bank of America Corp for £1.9bn in cash, the first serious deal since the bank’s crisis bailout.
This return to dealmaking shows Lloyds is now able to stand on its own two feet. After years of restructuring, the group is looking for ways to drive growth, and clearly acquisitions from part of management’s growth agenda.
On the face of it, the MBNA deal looks well thought out. MBNA will immediately increase group revenue at closing by £650m per year and boost the group’s overall net interest margin by around 0.1%. Lloyds is expecting MBNA will deliver an underlying return on investment ahead of the cost of equity in the first full year of ownership and will give a 17% return on investment in the second full year after the deal.
Cost synergies are expected to be significant as Lloyds integrates MBNA into the bank’s existing infrastructure. Lloyds has pencilled-in £100m in annual cost synergies from the integration of the business within two years, around 30% of the total cost base for MBNA in 2015. MBNA has around £7bn of gross assets on its books, and the deal is expected to completed by the end of the first half of 2017, subject to competition and regulatory approval.
Lloyds is funding the acquisition with cash on hand.
Building the brand
I believe Lloyds’ acquisition of MBNA could be an attempt by the bank to replicate the Barclays (LSE: BARC) success story with Barclaycard, which is arguably the jewel of the Barclays group.
Barclaycard generated around a third of group operating profits last year. The unit achieved a return on tangible common equity of 26.3% for the first half of 2016 compared to a return of 11% for the core Barclays group as a whole. As well as this highly attractive return, for the first half of 2016 Barclaycard expanded its number of loans to US customers by more than 30% and loans to German customers by 26%. Profit before tax for the unit grew 41% year-on-year during the period.
With such rapid growth on offer, it’s no surprise Lloyds is looking to expand its credit card business. The new growth should offset declining mortgage applications and the bank’s contracting net interest margin. These pressures are expected to drag down Lloyds’ earnings per share by 17% for this year and 7% during 2017. The MBNA deal should offset some of these declines and improve returns for shareholders.
Conclusion
Overall, it looks as if Lloyds’ deal to buy MBNA is a great move for the bank. The payback period is short, and the deal will allow Lloyds to increase its presence in one of the fastest growing markets for financial products.
