J Sainsbury (LSE: SBRY), the UK's third largest grocer, has confirmed rumours that it is looking to buy out Lloyds Banking Group's (LSE: LLOY) 50% stake in Sainsbury's Bank and take full control of the operations.
Although Sainsbury's beat larger rival Tesco (LSE: TSCO) in starting up its banking operations, Tesco took full ownership of Tesco Bank nearly five years ago when it paid £950m to buy out RBS's 50% stake.
The right time for a move
This is good news for Lloyds shareholders, as it should provide a couple hundred million pounds of fresh capital as the bank attempts to clean up its balance sheet and focus on its core operations.
The move also makes sense from Sainsbury's standpoint because the grocery and retail market in the UK is rather mature and, although the grocer has been making headway in winning market share recently, growth is slow in coming. If the company plans to grow much more, it will need to expand its sources of revenue.
Sainsbury's Bank offers this opportunity and, with an estate of 576 supermarkets and 487 convenience stores, there are plenty of ready-to-serve distribution points -- banks call them branches -- already in existence. Additionally, and like Tesco's Clubcard, Sainsbury's Nectar card provides it with a shedload of information on its customers shopping habits and therefore insight into their economic well being and ability to repay loans. These are nice advantages over a bank starting from scratch.
The move into banking also comes as the government is pushing for more competition in the industry and consumers have lost faith in their existing banking options.
No express lane for success
Of course, it isn't a no-brainer -- it took until the middle of last year before Tesco was able to get its banking platform fully up and running, which delayed Tesco Bank's ability to offer basic banking services like mortgages. We will have to see how the hand-off from Lloyd's to Sainsbury's goes.
In addition outside of their self-generated problems, it isn't a great time for the banking sector as the health of banks is tied closely to the health of the economy. Traditional banks like Lloyds have been suffering from low interest rates and competition for deposits, which has limited the profitability of even their supposedly healthier core operations.
Throwing more competition into the market may provide consumers with better access to financing and customer service, but isn't going to ease these pricing pressures for the banks.
Sainsbury's history in retail makes it quite familiar with trying to differentiate itself in an industry of heavy pricing competition, so perhaps it will be able to teach the incumbents a thing or two about luring away customers.
Shareholders definitely hope so as a successful venture into banking could provide a nice growth avenue for the company, but a botched run could be a costly distraction to a management team currently fighting furiously to sustain its recent wins in the grocery market.
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