Challenger banks are increasingly on the lookout for acquisition opportunities as rising interest rates reveal takeover opportunities in the sector.
Nigel Terrington, chief executive of Paragon Bank, told City A.M. that they “continue to look for opportunities” having made four acquisitions in seven years.
Terrington noted that “in environments like this, some lenders are not as strong as we are… We are looking for M&A opportunities to supplement our strong organic growth”.
Digital challenger bank Cashplus is also looking for takeover targets.
Rich Wagner, chief executive of Cashplus told City A.M. there’s been “a definite shift over the last 18 months with some of the extremely high valuations previously seen in the market taking a serious reality check.”
Wagner said the next phase will likely see “some form of consolidation in the market”. In particular Wagner highlighted “non-banks that are now struggling with higher funding costs” as likely takeover targets.
While rising interest rates have been a boon for many UK lenders, it has also acted as a reality check for some of the smaller players in the market.
Higher rates have increased the funding costs for all banks, but particularly non-banks who do not take deposits. Deposits are the cheapest form of funding available to banks.
Many in the industry now expect that there will be a slew of M&A activity over the coming months as the industry adapts to an environment with higher interest rates.
“Smaller banks need to find a way to scale their platforms” in an environment with rising costs and lower lending volume,” Ravi Anand, managing director of non-bank lender Thincats .
“With IPO markets shut and investors wishing to enhance their value, consolidation is likely.”