Spanish lender Sabadell intends to transfer newly acquired UK bank TSB onto its IT platform in a move that highlights the vital role that IT plays in banking strategy. 

The power of IT to make or break a bank’s business model is one of the key take aways from Sabadell’s bold move on the UK's TSB. The Spanish lender has proposed a £1.7bn ($2.5bn) takeover of TSB, and plans to move the bank onto its own core banking platform on completion of the deal. But, even if the Spanish bank gets all its IT sums right, it may still need to make further acquisitions to launch an effective assault on the UK market.

TSB, which has only about 5% of the UK’s branch network, was spun out of Lloyds, in order for the bank to comply with EU sanctions on banks that fall into state ownership – as Lloyds did following the financial crisis. Failing to find a buyer, Lloyds carved out TSB in 2013, and listed 38.5% of it last June, selling a further 11.5% in September.

The UK banking market is highly competitive, with strong incumbents and a crop of challengers, so not all analysts were convinced that TSB could deliver on its growth forecasts.

German bank Berenberg had a sell order on the bank and was clearly taken aback by the approach from Sabadell – Spain’s sixth largest bank by Tier 1 capital and fifth largest by assets, according to The Banker’s Top 1000 Banks ranking. “While M&A was always a risk to our sell thesis, Sabadell’s bid was a major surprise to us,” says a Berenberg report.

Key to understanding Sabadell’s strategy is both the role IT plays in banking and the terms of the IT deal Sabadell had with Lloyds. Under these terms, if Sabadell stays with Lloyds, it pays the bank £100m annually rising to £200m in 2017 for using its IT system. But, if TSB sets up or moves to a new platform, then Lloyds pays £450m of the costs of doing so.

While IT projects are notorious for over-running in both time and cost, the Sabadell bid, which must close by April 9, is clearly positioned around the cost savings of putting TSB onto Sabadell’s IT system. The UK’s Prudential Regulation Authority also requires TSB to hold some capital against the risks of operating on Lloyds’ IT system, so there could be a further gain in capital terms. But under the UK’s domestic ring-fenced regime the regulator may not be hugely generous.

All this suggests that there has to be more to Sabadell’s strategy than mere cost reduction. Sabadell must reckon that its IT system and products can also make headway in a crowded market such as the UK’s. Analysts have talked about the need for TSB to double the size of its balance sheet to justify its existing infrastructure. Unlike many challengers, it also depends on a branch-based model with all the costs that involves.

The TSB acquisition would mean that Sabadell has 22% of its assets outside of Spain, which is part of its strategic plan. The bank points out that it has completed seven successful integrations so far and said in a statement that “its broad experience in customer service, especially in personal banking and small and medium-sized enterprises, will be key for generating major synergies”.

But is this sufficient? Following in the footsteps of Santander, which made three UK acquisitions – Abbey, Bradford & Bingley and Alliance & Leicester – Sabadell may find it needs to make other purchases to really have the heft required in the UK.

Brian Caplen is the editor of The Banker.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter