Sainsbury's mulls sale of banking arm amid near-zero interest rates

LaToya Harding
·2-min read
A Sainsbury's store sign
Sainsbury’s took full control of its banking arm seven years ago after paying £260m ($337m) to joint venture partner Lloyds Banking Group. Photo: Reuters/Alessia Pierdomenico

Sainsbury’s (SBRY.L) is exploring the sale of its banking operation as ultra-low interest rates eat into the lenders profits.

Sources told Sky News this weekend that new chief executive Simon Roberts, who took the helm earlier this year, has asked the company’s corporate broker and financial adviser UBS (UBS) to advise it on options.

The supermarket giant is seeking potential buyers for its financial services unit, which it first launched in 1997, however, it was not clear if more radical alternatives, such as closing the banking operation, was also being explored.

Sainsbury’s took full control of its banking arm seven years ago after paying £260m ($337m) to joint venture partner Lloyds Banking Group.

The banking arm currently has more than 2 million mortgage, insurance and credit card customers. Sainsbury's also owns the Argos Financial Services business after its takeover of Argos in 2016.

It comes as small and medium-sized lenders have been recently battling near-zero interest rates and tough competition, which have put a strain on margins.

The possibility of negative rates, which the Bank of England (BOE) has not yet ruled out, has exacerbated concerns among bank bosses. Earlier this month, the BOE wrote to banks to see how ready they are for zero or negative interest rates.

Unheard of a decade ago, negative rates were widely pursued across Europe in the wake of the 2008 financial crash. The deposit rate at the European Central Bank remains negative.

READ MORE: What are negative interest rates and can they help the economy?

BOE cut the UK’s interest rate to a record low of 0.1% as the COVID-19 pandemic first struck in March, leaving it little headroom to spur inflation and growth through interest rate policy. Financial markets predict interest rates in the UK will turn negative within the next 12 months.

At the start of this month, BOE governor Andrew Bailey said that negative interest rates were “in the box of tools” but said the bank had “no plans to use it imminently.”

The BOE has gone back and forth on whether negative interest rates could be a reality for the UK economy. Experts have warned that negative interest rates could be the end of free bank accounts.

According to analysts, in extreme cases banks could be forced to start charging millions of customers a monthly fee.

Yahoo Finance has reached out to Sainsbury’s for comment.

Watch: What are negative interest rates?