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Barclays has agreed to buy the bulk of Tesco’s banking business in a £600mn deal, as UK supermarket chains accelerate their retreat from an ill-fated expansion into financial services.
Barclays said on Friday that it would take on Tesco Bank’s credit cards and unsecured personal loans, totalling about £8.3bn of lending balances.
It has also signed a 10-year distribution deal to sell financial products under the Tesco brand.
As part of the agreement, the UK’s largest supermarket will keep its insurance, ATMs, travel money and gift card operations, which it described as “capital-light, profitable businesses with a strong connection to our core retail offer”.
Tesco’s decision to quit the business comes after rival J Sainsbury last month said it planned a “phased withdrawal” from its banking business and would instead sell financial services through third parties.
Tesco and Sainsbury’s were among a wave of high-profile retailers that pushed into financial services in the 1990s, initially through joint ventures with established high-street banks. But the bet that they could win significant market share relatively cheaply has proved misplaced.
CS Venkatakrishnan, chief executive of Barclays, said that the transaction “will help create new distribution channels for our unsecured lending and deposit businesses” and was a “further demonstration of the investment we continue to make in our UK consumer business”.
About 2,800 staff will be transferred from Tesco to Barclays. The supermarket said that proceeds from the sale would be returned to shareholders via buybacks, which along with the exit from the business and the distribution deal would be “mildly accretive to earnings per share”.
The acquisition by Barclays follows its £2.2bn purchase of Kensington Mortgages last year. Barclays and Tesco expect the transaction, which will require regulatory approval, to complete in the second half of the year.
It comes as the bank is yet to close on the sale of its German consumer finance unit as it focuses on simplifying its structure and growing key businesses.
JPMorgan analyst Raul Sinha said investing in Barclays’ UK retail bank could be “return-enhancing” in the long run for the lender, which is under pressure to decrease its reliance on investment banking.
Barclays’ UK consumer bank division generates the highest return on tangible equity, a key measure of profitability, while consuming much less capital than its investment bank, according to JPMorgan.
However, more share buybacks could have been a better option for investors, said analysts, given that Barclays’ stock is trading at a 60 per cent discount to the book value of its assets, higher than the 40 per cent discount on the Tesco book it is acquiring.
Barclays is due to update on its strategy in February, with shareholders looking for capital and operational efficiency improvements that would boost its return on equity.
Tesco chief executive Ken Murphy said that disposing of the business would generate “greater value for customers and for our business” and would allow the supermarket chain to “bring customers new and innovative propositions, which will continue to benefit from Tesco Clubcard’s unique insight and digital capabilities”.
Shares in Tesco rose 1 per cent to 282.80p while Barclays’ shares were 1 per cent lower at 141.80p by mid-morning in London on Friday.
