Metro Bank (LSE: MTRO) is in the early stages of exploring a potential £2 billion merger with Aldermore, the British challenger bank currently on the market following its involvement in the motor finance mis-selling scandal.
Sky News reported that Metro Bank is among several parties actively evaluating whether to submit a formal offer for Aldermore, which specializes in mortgages and business lending.
Aldermore’s South African parent company, FirstRand, announced in April that it was putting the business up for sale after calculating that the car finance affair would cost it approximately £750 million in compensation payouts.
FirstRand originally acquired Aldermore in 2017 for £1.1 billion, meaning the bank’s potential £2 billion valuation would represent a significant return on that original investment.
Lloyds Banking Group, the UK’s biggest retail bank, has also been identified as a party engaged in the sale process, alongside Shawbrook Group and a number of other major UK banks.
Metro Bank’s interest in Aldermore signals the extent of its remarkable recovery following a serious crisis in 2023 that nearly caused the bank to collapse entirely.
The lender was rescued through a £325 million fundraising effort led by Colombian billionaire Jaime Gilinski, who now holds just over 50% ownership of the bank.
Reports from last year suggested that Gilinski would be open to selling his stake, raising further questions about the longer-term ownership structure of the recovered bank.
Metro Bank currently carries a market valuation of approximately £1.1 billion, with its shares having risen by around a third over the past year under the leadership of chief executive Daniel Frumkin.
Frumkin has received recognition from investors for refocusing the bank on more profitable lending activities while simultaneously driving down operating costs.
One significant hurdle for Metro Bank in any potential deal is the question of how it would finance an offer, with options including raising fresh equity or structuring part of the consideration in stock.
However, FirstRand is not thought to be willing to accept a paper-based transaction, which could complicate Metro Bank’s ability to structure a competitive bid.
Banking sources have indicated that any prospective buyer of Aldermore will likely need to secure an indemnity against further compensation liabilities stemming from the motor finance scandal.
The Financial Conduct Authority’s £9.1 billion redress scheme has faced significant disruption due to legal challenges, including from the finance arms of BMW and Volkswagen.
FCA chief Nikhil Rathi has publicly criticized opponents of the program and the claims management firms involved in challenging the redress framework.
Metro Bank declined to comment on the reported merger discussions with Aldermore.
