J Sainsbury poised to exit mortgage lending.

In News by redsocks

FT.

J Sainsbury is expected to exit mortgage lending to improve the profitability of its banking unit and conserve capital, as it sets out a new strategy following its failed takeover bid for rival Asda.

The UK’s second-biggest supermarket chain had planned to acquire Asda and use the resulting scale to reduce its buying and operating costs, but competition regulators blocked the deal this year. This week, it will host an investor visit to a store in Southampton where it will detail its revised strategy.

One person with knowledge of the bank’s plans said mortgage lending was “very capital intensive, and it’s a big amount of capital for a small amount of customers”.

Sainsbury’s mortgage book is £1.47bn, about a fifth of its total lending.

Although “ringfencing” rules that became effective at the start of 2019 do not affect Sainsbury’s because it has less than £25bn in deposits, they have resulted in increased competition in the mortgage market and a squeeze on margins.

Instead, the retailer is expected to refocus its bank on providing less capital-intensive services — such as insurance and credit cards — to customers of Sainsbury’s and Argos, especially those who are members of the Nectar loyalty card scheme.

It will aim to target these customers more effectively and so reduce the commission it pays to entities such as price comparison websites for introducing new business.

Tesco recently completed the £3.8bn sale of its mortgage book to Lloyds, citing a need to simplify product ranges and reduce funding costs.

Analysts have long been sceptical about Sainsbury’s banking arm, which was originally established as a joint venture with Bank of Scotland. Nick Coulter at Citi calculated that since Sainsbury’s spent £248m taking control of the bank in 2013, it has put in almost £700m of additional capital to support lending and spent more than £650m on IT and other costs.

The bank made a £34m loss last year, though a profit of £45m is forecast for the current year.

At full-year results in May, group finance director Kevin O’Byrne acknowledged the “disappointing” performance of the bank and said the company was examining ways to limit the capital required. “We are looking at growing the commission-type business.” However, he said there were no plans to sell the bank.

Since then Sainsbury’s has appointed Jim Brown, a Royal Bank of Scotland veteran, as chief executive of the bank. He took up the post last week after receiving regulatory approval.

The company declined to comment.

Sainsbury’s is also likely to stress the growing role of customer data in its organisation. In 2018, it paid £60m to buy the Nectar loyalty card scheme, of which both it and Argos are members, from Canada’s Aimia.

Nectar data are increasingly used to augment traditional credit-scoring within the financial service business and to identify cross-selling opportunities.

Analysts also expect updates on cost reductions, and more on the supermarket’s plans to make its pricing more competitive — one of the main reasons for the Asda transaction.

Over the summer, Sainsbury’s has used price cuts, coupon offers and petrol promotions to help lure customers through the doors, and rebadged some products in its entry-level “Basics” ranges. The most recent data from Kantar show that it has reduced market share losses; in the past two 12-week periods, it has been the best-performing of the big four supermarkets.