Barclays to buy British specialist lender Kensington Mortgages

Barclays has agreed to buy UK specialist lender Kensington Mortgages in a £2.3billion deal, as the bank strives to improve its mortgage market share despite the threat of a recession.

The British bank will acquire Kensington’s £1.2 billion mortgage book as part of the deal, according to a statement on Friday. Barclays said the value of the deal was based on its conclusion in December and Kensington’s mortgage portfolio comprising £2bn of loans at that time.

Kensington’s purchase from private equity firms Blackstone and Sixth Street followed an auction process that attracted interest from a range of bidders. They included rival start-up Starling Bank, according to people familiar with the situation.

Barclays has long seen itself as underrepresented in home lending. The bank is the country’s fifth-largest mortgage provider with a market share of around 10%, about half that of market leader Lloyds Banking Group, according to data from UK Finance.

“Financially, we think the deal could make sense,” said Numis analyst Jonathan Pierce. “The pound that Barclays buys will be quite small initially… but Kensington is targeting issues of £2.3bn a year, so that pound could grow to £6-7bn within three years. would imply a revenue of £200m.

The move comes amid fierce competition in UK mortgages after house purchases surged during the pandemic. With base rates rising, banks should also receive an increase in interest income.

Executives were keen to strengthen Barclays’ position in the market and better balance its business model. Mortgages have for years been relatively weak compared to its top position in credit cards, where it accounts for more than a quarter of the market.

However, some analysts have questioned the wisdom of the bank’s expansion into a risky area of ​​the market as the UK could potentially tip into recession amid a cost of living crisis, which is likely to stretch vulnerable borrowers and drive up default rates.

While “this transaction is relatively small against the backdrop of Barclays’ existing £156bn mortgages, we are nonetheless somewhat surprised by this announcement and the price appears high,” said Citigroup analyst Andrew Coombs. “We question 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 focusing on providing residential property loans through brokers to those who may find it difficult to borrow from the big high street banks, such as the self-employed and over 55s.

The lender was owned by Investec until 2014 when 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 expand our product range and capabilities”.

About 70% of Kensington’s mortgage portfolio is owner-occupied, while 30% is buy-to-let. The portfolio has an average loan-to-value ratio of 77%.

Barclays said it expected the deal to be finalized in the fourth quarter and would reduce its Tier 1 common equity ratio, a measure of financial strength, by around 12 basis points.

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