Consolidation wave reshapes lending landscape
Consolidation within the UK banking sector is set to intensify, according to Moody’s Ratings, as mid-sized lenders face increasing challenges related to scale, regulatory compliance and limited pricing power.
Recent acquisitions by major building societies — Nationwide’s deal to acquire Virgin Money in October 2024 and Coventry Building Society’s purchase of The Co-operative Bank in January 2025 — reflect a broader trend of challenger banks exiting the market.
Other significant withdrawals include Tesco Bank, which sold its banking division to Barclays in late 2024 after divesting its mortgage book to Lloyds in 2019. Metro Bank exited retail lending in early 2025 to become a specialist small business lender, while Sainsbury’s Bank offloaded its consumer banking products to NatWest in May 2025.
Moody’s said these developments will ease competition for the UK's five largest lenders — Lloyds, NatWest, Barclays, HSBC and Nationwide — which collectively hold over half of all loans and deposits in the country.
"Regulatory and technology costs create proportionally higher burdens for smaller institutions, while limited pricing power restricts their ability to generate returns," the ratings agency said.
Moody’s expects sector profits to weaken in 2026 and 2027 due to falling interest rates and reduced credit demand tied to slower economic growth. In that context, smaller banks may seek mergers or asset sales to preserve value before market conditions worsen.
Banco de Sabadell has received initial interest from potential buyers for its UK subsidiary, TSB Banking Group. Moody’s estimates TSB could fetch around £2.5 billion, up from the £1.7 billion Sabadell paid in 2015. Despite some improvement in recent years, TSB’s profitability continues to lag its peers due to structural inefficiencies and limited diversification.
Several specialist lenders may also attract acquisition interest. OSB Group, which focuses on buy-to-let mortgages, holds approximately £25 billion in loans. Paragon Banking Group, with £16 billion in lending, operates in both specialist lending and savings. Shawbrook Group and Aldermore Group serve SME and property sectors and could appeal to larger players seeking niche exposure.
Close Brothers Group may become a target due to financial pressure stemming from an ongoing regulatory review into historical motor finance commission practices. The firm faces potential compensation costs and has seen its market capitalisation fall to about £550 million.
Among major banks, NatWest is seen as well-positioned for further consolidation activity following its return to full private ownership and strong 2024 earnings. Barclays may also seek acquisitions to strengthen its UK retail and business banking unit, which delivered higher returns than its investment arm last year.
HSBC, by contrast, is likely to prioritise growth outside the UK, particularly in Asia-Pacific and the Middle East. Meanwhile, Lloyds may face regulatory barriers to further expansion due to its current market share, and Nationwide is expected to focus on integrating Virgin Money.
Any further deals involving the largest lenders could face scrutiny from competition regulators — especially if they involve large mid-tier banks such as Santander UK, which currently holds 8% of UK loans and 6% of deposits.
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