Santander could provide a further £1bn of its own capital to help shore up Alliance & Leicester's balance sheet, in addition to the £1.25bn of shares it is providing, according to Morningstar.
Morningstar fund analyst Erin Davis believe deleveraging A&L will also be a major priority for Santander.
In an all-share deal worth £1.25bn, Alliance & Leicester agreed yesterday to become part of Santander’s Abbey Brand. However, Davis believes Santander will contribute a significant amount of additional capital as part of the deal.
“The deal is not without risk to Santander, which will add £1bn of its capital to A&L's balance sheet in order to shore up its finances,” says Davis.
With falling property prices and rising arrears and repossessions, Santander is also at risk from losses to its loan book and Davis says it is likely to deleverage A&L by selling off assets over the next two years.
However, the deal also offers benefits. Davis says Santander has acquired A&L for an attractive price, just 9% over its average share price during the past month. The deal could still fall through, but Morningstar believes that is unlikely in the current environment, with bank share prices falling rapidly over the past twelve months.
In addition, A&L should merge well with Santander’s existing Abbey business, while giving it access to a larger share of the UK market, particularly with small and medium-size business banking clients.
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