Sabadell’s UK Bank Sale Could Be a Win-Win-Win | Company Business News

Judged by the share prices, Banco de Sabadell SA’s deal to sell its UK arm, TSB, to Spanish rival Banco Santander SA for nearly £2.7 billion is great news for everyone involved. The British sale all but guarantees a big payout for Sabadell investors, while giving Santander a small but helpful lift in its quest to boost its UK returns. And then for BBVA SA, this moment may offer a face-saving way out of its long and increasingly troubled pursuit of Sabadell.

Carlos Torres, BBVA’s chairman, has every right to feel aggrieved at the way his expansion plans have been frustrated by politics and his target’s nimble maneuvers. However, he needs a cool head now to assess if the tender offer to Sabadell shareholders is still worth launching. The pull of sunk costs and indignation can both be very strong.

To persuade Sabadell investors, BBVA would need to promise them the same cash payout that the TSB sale now does. That would likely mean lower rewards for BBVA investors, assuming it also would ultimately have sold the UK arm after a takeover. While, the Spanish government’s politically self-preserving decision last week to impose a minimum three-year delay on an integration of the two banks already threatened returns on the acquisition, the TSB sale might finally undermine the financial gains available on any reasonable timeframe. Torres must carefully set out the costs and benefits that are still achievable, if there are any. The bank didn’t comment on Wednesday.

This isn’t a great look for Spain or its business environment. The only voices you will hear defending the government’s action are linked to Sabadell: They insist the intervention was about protecting jobs and the supply of small-business finance, despite the country’s competition regulator clearing the takeover. 

The TSB sale is a no-brainer for Sabadell management. It has cleaned the UK bank up and boosted its returns over a decade of ownership after a tough start. It is now selling TSB for about 1.5 times the book value reported at the end of March, or 10.5 times earnings forecast for 2025, according to RBC Capital Markets — a higher multiple than Sabadell or Santander. 

Santander will pay in cash – funded by the recent sale of its Polish unit – which boosts Sabadell’s war chest for shareholder returns by €2.5 billion . It promises to pay this out in a €0.50 per share dividend when the UK sale closes in early 2026, which will add to the roughly €0.26 per share in ordinary dividends it has already promised. Any Sabadell investor that tenders their shares to BBVA before then won’t get this money, unless BBVA increases the cash element of its bid to match.

The deal makes sense for Santander, too, although there’s a risk that it is giving away too much of its expected savings in the full price it is paying. Santander’s problem in the UK is profits that are weaker than peers’: Over the past five quarters, its pretax return on risk-weighted assets has averaged just 2.9%, a full percentage point lower than the next worst, the retail business of NatWest Group Plc. 

This is a legacy of the deals that built Santander’s UK arm. It bought several building societies – a type of savings bank – which tend to pay higher deposit rates. Santander has been turning savers into current account holders but has struggled to bring its funding costs down. TSB’s deposit base, equivalent to 18% of Santander UK’s deposits at the end of March, is cheaper and will help reduce overall costs.

Santander also predicts £400 million of cost savings – roughly half of TSB’s current expenses – from cutting branches, head office and other property, ditching planned investments and shifting TSB to its own IT systems. By 2028, those savings would lift its return on equity in the UK by 2 percentage points, which adds to existing targets for increasing revenue and cutting costs. All in, Santander UK predicts it will lift post-tax returns to 16% in 2028 from 11% last year – that’s decent, but still lags the more than 20% returns produced by Barclays Plc’s UK arm and NatWest’s retail unit.

Not long ago, Santander was reported to have entertained offers to sell the UK business, but since then executives have insisted that they like its low-risk and predictable profits, especially next to the more volatile returns of faster-growing Latin American businesses. TSB can help its UK profits without harming these attractions of their character. 

Sabadell investors will vote on the TSB sale on Aug. 6. Absent any regulatory problems, which seem unlikely, it’s hard to see why they wouldn’t take it. Sabadell’s stock jumped up to 5% Wednesday, while Santander was up as much as 3% and BBVA rose 1.8%. Everybody wins. Well, apart from BBVA’s management, which could still risk disappointment if pride alone pushes its Sabadell bid onward. Over to you, Carlos Torres.

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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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