Challenger banks Charter Court, OneSavings soar on merger talks

(Reuters) - Online mortgage bank Charter Court Financial Services and OneSavings Bank are in advanced talks to create one of Britain’s biggest specialist lenders, marking a major step toward consolidation in the challenger banking market.

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Shares in the two companies, which specialize in buy-to-let mortgages, jumped sharply on the announcement they were in talks about an all-share combination, with OneSavings’ stock up 9.7 percent at 405.8 pence and Charter Court’s shares up 9.5 percent at 335.6 pence by 0956 GMT.

The two banks have a combined market value of 1.64 billion pounds ($2.13 billion), based on the stocks’ closing prices on Friday.

A deal would follow rival mid-sized bank CYBG and Virgin Money, which joined forces last year, and comes at a time when margins have been constrained by pricing pressure in a mortgage market where competition is high and growth, due to the uncertainties of Brexit, hard to come by.

“The combination of the lenders would create a leading specialist mortgage lender in the UK with greater scale and resources to deploy on growth opportunities,” said Peel Hunt analysts in a note, adding that it estimates the combined loan book to be around 15 billion pounds, with a buy-to-let book of more than 11 billion pounds.

OneSavings was founded in 2011 as part of a private equity buyout of the Kent building society KRBS, while Charter Court was launched in 2008, when it was majority owned by U.S. investor Elliott Management.

Under the terms of the proposed deal, OneSavings will buy all of Charter Court’s shares for 0.8253 new OneSavings share for each Charter Court share, whose biggest investor is Elliott Management.

Elliott, which now owns 31.4 percent of Charter Court, declined to comment when contacted by Reuters.

OneSavings shareholders would hold about 55 percent and Charter Court shareholders would own the rest in the combined group, the banks said, adding that OneSavings’ top boss Andy Golding would become chief executive officer.

(Graphic: As Brexit nears, UK's challenger banks mirror nervous economy -

“The deal presents strategic merit ... we see the move as a clever ploy by both Boards to put the banks ‘in play’ as well as minimizing any sell-off in response to political developments,” Goodbody analysts said.

Britain’s banking sector is dominated by six lenders - RBS, Lloyds , Barclays , HSBC, Santander and building society Nationwide .

Challengers such Metro Bank and specialists such as OneSavings have been growing, although the path to breaking up the dominance of Britain’s biggest banks has not been smooth.

Metro Bank has been hit by an accounting blunder which triggered a hefty investor cash call, sending its shares into a tailspin.

Rival CYBG has had to contend with charges for PPI misselling, but it surprised investors last month after it lifted its forecast for margin growth and reported a rise in lending in a tight mortgage market.

($1 = 0.7701 pounds)

Reporting by Noor Zainab Hussain in Bengaluru amd additional reporting by Maiya Keidan in London; Editing by Gopakumar Warrier and Louise Heavens