As the next wave of banking consolidation gets underway, specialist lenders are poised to be absorbed.
The sector has witnessed a surge in mergers and acquisitions in recent years, with the most recent being a significant merger between Santander and TSB Bank, as reported by .
Santander acquired 12 year old British high street lender TSB for £2.65bn at the start of July from Sabadell, marking another mid-tier consolidation.
However, analysts at Moody's have suggested that further deals involving mid-tier banks are "unlikely for the time being", predicting instead that specialist lenders will "drive º£½ÇÊÓƵ bank consolidation in the months ahead."
Specialist banks present an appealing acquisition for a major lender, offering a means to diversify their operations by establishing a presence in a more niche market.
"These banks are generally profitable, making them attractive to incumbent buyers, and are in some cases owned by private equity firms that may be open to merger and acquisition approaches," stated analysts Alessandro Roccati and Simon James Robin Ainsworth.
Paragon
Analysts have identified Paragon, which boasts a market capitalisation of nearly £1.8bn, as a prime candidate for takeover.
As of 9 July, Paragon's price-to-earnings ratio – a crucial measure of how much a buyer is paying for each pound of the bank's earnings – stood at 9.26, indicating that the bank's stock traded at 9.26 times its earnings.
Thanks to its appealing takeover valuation and robust net interest margin – a key gauge of a bank's lending profitability – the company may capture the attention of potential acquirers.
In the first half of the year, the FTSE 250 bank's profit surged by 26.7% to £149.4m, driven in part by a boost from mortgage lending.
Paragon's commercial lending portfolio encompasses development finance, SME lending, and asset finance.
OSB
As a specialist mortgage lender, OneSavings Bank (OSB) concentrates on niche segments such as buy-to-let.
The bank's market capitalisation approaches £1.9bn, with a price-to-earnings ratio of just under seven.
OSB has already been the subject of M&A speculation, with reports suggesting it had considered a merger with Charter Court Financial Services group, a provider of specialist mortgage products.
Last year, the FTSE 250 bank highlighted "increased competition in the subdued mortgage market" as the Bank of England began to cut interest rates.
Although shares took a hit last year, they have since gained over 40% year-to-date to 561p, and further rallies could propel the bank past its all-time high of 590p, set in April 2022.
Shawbrook
In contrast to OSB and Paragon, analysts described Shawbrook as "unlike" its peers, yet still an attractive candidate for potential buyers.
At the end of 2024, the private equity-owned bank held £15bn in loans and £16bn in deposits. The company has previously expressed its interest in mergers and acquisitions, with a potential £5bn merger with º£½ÇÊÓƵ fintech stalwart Starling and reports that its owners, Pollen Street, approached Metro Bank for a takeover.
However, both potential deals seem to have lost momentum, but analysts at Moody's suggested Shawbrook could find itself at the centre of another bid – this time on the receiving end.
Close Brothers
Close Brothers presents a unique case for a deal due to its ongoing Supreme Court case.
In April, the bank escalated its battle to overturn the Court of Appeal's October ruling, which deemed it unlawful for banks to pay a commission to a car dealer without the customer's informed consent, to the highest court in the country.
"The bank could become a takeover target if any such penalties were sufficiently large to weaken its solvency: its specialist expertise would be attractive to larger banks and its highcost base would provide an opportunity for buyers to extract synergies," said Roccati and Ainsworth.
However, they cautioned that "significant liabilities" could deter potential buyers.
The bank's price-to-earnings ratio turned negative after plummeting to a £104m loss in the first half of 2025.
Shares have managed to make some recovery since the Court of Appeal's landmark verdict after rallying over 70 per cent for the year-to-date.
However, this remains down over 17 per cent for the year hovering around 400p.
The buyers
Among the "Big Five incumbents" – Natwest, Lloyds, Barclays, HSBC and Nationwide – analysts anticipate only three to be "interested in making targeted acquisitions".
Lloyds is forecasted to remain on the periphery due to its established supremacy in retail banking, boasting an 18 per cent share of loans and 16 per cent in deposits.
Likewise, Nationwide is predicted to be preoccupied with integrating its £2.3bn acquisition of Virgin Money.
In contrast, HSBC, Natwest and Barclays are expected to adopt a proactive stance to bolster their position in the competitive market.
The anticipated increase in deals is attributed to weak economic growth curtailing credit demand, high operating costs and diminishing net interest income.
"We foresee no let up in these pressures in the months ahead," stated the analysts.
