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(Sharecast News) - Quilter shot to the top of the FTSE 250 on Tuesday as RBC Capital Markets suggested it could be a potential takeover target for Lloyds.
RBC noted that UK banks, and particularly Lloyds, are underpenetrated in wealth management, missing out on relatively high structural growth and returns.
"In light of narrowing valuation differentials, we think that the imminent introduction of Target Support could act as a catalyst for Lloyds to acquire a wealth manager, and we see Quilter as a particularly attractive proposition," it said.
RBC pointed out that Quilter has a digestible market cap, a national distribution footprint and an adviser base that can cater to mass affluent clients, which is where it sees the greatest cross-selling opportunity.
It said the group structure has simplified considerably since listing, and with re-platforming, slow organic growth, ongoing advice issues all seemingly behind the company, RBC believes Quilter is now a fundamentally more appealing asset than at any time since listing, yet is trading at close to the five-year average in price-to-earnings terms.
RBC noted that unconfirmed press reports suggest Lloyds is considering buying the approximately 50% of the joint venture that it does not own.
It said the ending of the SPW JV with Schroders could represent Lloyds "clearing the decks before bolstering their affluent wealth offering through inorganic activity in our view".
It said Lloyds has around 3m affluent customers and therefore it makes sense that a key part of the bank's strategy is to grow stickier non-interest income through increasing insurance and wealth product penetration, particularly in a falling rate environment post structural hedge roll off.
"We estimate that LLOY would need to pay £3.1bn to acquire Quilter, funded through excess capital and buyback forfeiture," it said. "This would propel the bank to No.2 in UK Wealth Management (circa £150bn assets under management).
"Whilst in our view this theoretical transaction makes sense strategically, financially and operationally the story is more complex."
RBC noted that around 6% earnings per share accretion and a return on investment of around 11% would not be achieved in the short term.
"Both institutions would need to grow into the relationship over a significant time-frame, and advisor capacity constraints could be a real limiting factor, although potentially this is an area where AI could provide significant efficiency gains."
At 1125 BST, Quilter shares were up 4% at 168.20p.
