British bank Lloyds (LYG) certainly created a lot of buzz when it announced it would buy Bank of America's (BAC) credit card business, MBNA, for £1.9 billion ($2.35 billion). Lloyds' New York-listed ADRs gained almost 3% on Tuesday after the announcement, and its London-listed shares opened almost 1% higher on Wednesday.
Investors perhaps should temper their enthusiasm and look deeper into the reasons for this deal. While on the surface it seems to signal a return of confidence in the U.K. economy, another way to look at it would be that it is actually a defensive rather than aggressive step for Lloyds.
As credit rating agency S&P noted in a statement issued after the transaction was announced, the deal "would transform Lloyds' market share in the profitable U.K. consumer cards segment from 15% to 26%, leaving it just behind market leader Barclays (BCS) ."
This may look like an attempt by Lloyds to catch up with its rival, but it also can be seen as an effort to diversify away from its main business, mortgages, where it leads the market with a 21% share. This is up from around 17.5% in 2015, according to data from the Council for Mortgage Lenders.
Indeed, Lloyds chief executive Antonio Horta-Osorio admitted that the purchase of MBNA offers his bank the chance to rebalance away from its dominant mortgage business, according to a report in the Financial Times.
It's high time to do so, too. The Prudential Regulation Authority (PRA) is revising the way that U.K. banks model probability of default and loss on residential mortgages to ensure that cyclical factors do not flatter the figures during periods of strong growth.
Banks will need to submit revised mortgage risk weighting models, which include the assumption of a fall of at least 25% in house prices, by the end of May next year to the PRA. The plan is that the new, more stringent risk weights will come into force by March 31, 2019.
This will probably mean that U.K. banks will need to rein in their mortgage lending, which could put a dampener on house price rises after years of widespread availability of cheap mortgages that have driven real estate prices to new record highs.
Taking into account a slowdown in foreign investment in U.K. property caused by a tightening of Chinese capital controls and uncertainty caused by the Brexit vote, it becomes clear that this does not bode well for residential property prices going forward.
MBNA is Britain's biggest monoline credit card issuer, with total balances outstanding of around £7.0 billion as at June 2016 and around 2.8 million active accounts, according to a presentation by Lloyds Bank. Even so, it is difficult to believe its acquisition will protect Lloyds if the full force of a Brexit storm hits the U.K. property market.