Barclays has agreed to buy UK specialist lender Kensington Mortgages in a £ 2.3bn deal, as the bank moves to improve its market share of home loans despite the threat of a recession.
The UK bank will acquire Kensington’s £ 1.2bn mortgage book as part of the transaction, according to a statement on Friday. Barclays said the value of the deal was based on it being completed by December and Kensington’s mortgage book comprising £ 2bn of loans by that point.
The purchase of Kensington from private equity firms Blackstone and Sixth Street followed an auction process that drew interest from a range of bidders. They included start-up rival Starling Bank, according to people familiar with the situation.
Barclays has long considered itself under-represented in home loans. The bank is the country’s fifth-largest mortgage provider with around a 10 per cent market share, about half that of market leader Lloyds Banking Group, according to UK Finance data.
“Financially, we think the deal could make sense,” said Numis analyst Jonathan Pierce. “The book Barclays is buying will initially be quite small. . . but Kensington is targeting originations of £ 2.3bn per annum, so that book could grow to £ 6bn- £ 7bn within three years. That would imply an income of £ 200mn. ”
The move comes amid fierce competition in UK mortgages after home purchases surged during the pandemic. With base rates now rising, banks are also set to receive a boost to their interest income.
Executives have been keen to boost Barclays position in the market and provide greater balance to its business model. Mortgages have for years been comparatively small compared to its top position in credit cards, where it accounts for more than a quarter of the market.
However, some analysts questioned the wisdom of the bank expanding into a risky area of the market when the UK could potentially tip into a recession amid the cost of living crisis, which is likely to stretch vulnerable borrowers and force up default rates.
Whilst “this deal is relatively small in the context of Barclays’ existing £ 156bn of mortgages, we are nonetheless somewhat surprised by this announcement and the price looks rich”, said Citigroup analyst Andrew Coombs. “We wonder about the logic of expanding into a riskier part of the mortgage spectrum at this point in the cycle.”
Kensington, which is based in Maidenhead, is a specialist mortgage lender that focuses on providing residential home loans through brokers to those who might struggle to borrow from large high street banks, such as the self-employed and the over 55s.
The lender was owned by Investec until 2014, at which point it was sold to private equity.
Matt Hammerstein, chief executive of Barclays Bank UK, said the deal “reinforces” its commitment to the UK residential mortgage market and “presents an exciting opportunity to broaden our product range and capabilities”.
About 70 per cent of Kensington’s mortgage book is owner-occupied, while 30 per cent is buy-to-let. The portfolio has an average loan-to-value of 77 per cent.
Barclays said it expected the deal to be finalized in the fourth quarter and that it would reduce its common equity tier one ratio, a measure of financial strength, by about 12 basis points.