(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By George Hay
LONDON, May 8 (Reuters Breakingviews) - Sainsbury’s (SBRY.L) has taken another baby step towards becoming a real bank. The UK supermarket chain confirmed on May 8 that it would buy out Lloyds Banking Group (LLOY.L) from their 50:50 joint venture, but continued to shy away from offering the main products that banks offer - current accounts and mortgages. The apparent timidity could be a holding strategy.
Getting into retail banking proper makes sense for the group. Operating margins in supermarket retailing are less than 5 percent. Royal Bank of Scotland (RBS.L) and Lloyds were at 38 and 37 percent, respectively, in 2012. With an established brand and a big property estate, Sainsbury’s has the potential to be a strong new entrant, and it doesn’t carry the bad debts of established players. While it outperformed rival Tesco (TSCO.L) in 2012, the group could also do with diversifying.
Sainsbury’s official line is that it can diversify organically. It reckons full control of its savings and personal loans will enable it to bolster the number of its supermarket customers buying financial products - currently just 5 percent. That justifies a long-term strategy of building its own bank platform over the next four years, instead of relying on Lloyds’ know-how.
There’s a better reason to hold fire. The UK current accounts market has long been dominated by a few big players. Newcomers face dauntingly high barriers to entry, but there have been encouraging recent signs that regulators want to tackle the oligopoly by opening up the payments system, the shadowy plumbing that banks need to be able to offer in order for current accounts to process multiple transactions like standing orders and direct debits.
To become a real bank right now and build the right platform, Sainsbury's would have to splash out a big part of the capital expenditure it wants to spend on new store space. If an ongoing government consultation can find an alternative way for new entrants to plug into the payments system, that investment might prove superfluous.
Add in the movable feast of UK bank capital requirements and a current review of the domestic mortgage market, and there’s a case for waiting. When the fog clears, Sainsbury’s should turn circumspection into action.
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- Sainsbury’s on May 8 announced revenue for the 52 weeks to March 16 of 25.6 billion pounds, up 4.6 percent, and a 6.2 percent jump in underlying pre-tax profit to 756 million pounds.
- The firm, which has a 16.8 percent share of the UK grocery market, also confirmed it would buy out Lloyds Banking Group’s 50 percent stake in Sainsbury’s Bank for 248 million pounds.
- Sainsbury’s said that like-for-like sales in 2013/14 would grow between 1 and 1.5 percent, after sales excluding fuel grew at 1.8 percent in 2012/13.
- Justin King, the supermarket’s chief executive, said he saw himself staying at the firm for several more years.
- The UK government published its consultation of reforming the UK bank payments system on March 26. It closes on June 25.
- At 1100 GMT, Sainsbury’s shares were trading at 383 pence, down 3.3 percent.
- Reuters: CEO King commits to Sainsbury's after beating forecasts [ID:nL6N0DP0TO]
- Reuters: Sainsbury's seeks full control of banking arm [ID:nL6N0DO0UH] - For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Pierre Briançon and David Evans)
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