News Column

Lloyds pushes TSB float with low share price: Spun-off bank valued at pounds 1.3bn, less than assets Profitability held back by low margin mortgage book

June 10, 2014

Jill Treanor

Lloyds yesterday underlined its determination to entice investors to back the stock market flotation of TSB by pricing shares in the new bank below its own valuation of the 631 branch network.

TSB would be valued at pounds 1.3bn, less than the pounds 1.5bn value of its assets, at the mid point of the range for the shares outlined by the 24% state-owned bank.

The 322-page prospectus, published by TSB - in which the bank styles itself as a new challenger to the "big four" players - illustrates the close ties that will remain with Lloyds even after the share sale. There is a 10-year agreement over IT systems, including a pledge from Lloyds to pay pounds 450m towards building a new computer system for TSB. Lloyds will also cover any bills for costs such as payment protection insurance mis-selling, and pension liabilities for the 8,600 TSB staff.

The prospectus also outlines a series of risk warnings facing the standalone bank. They include risks associated with independence for Scotland - where it has 27% of its 4.5 million customers - together with political intervention before the general election next May and the TSB's ability to compete with the existing major players on the high street. Lloyds will receive pounds 179m a year in fees for its IT support.

Lloyds was supposed to have already sold off the branches, code-named Verde, under the terms of a deal thrashed out with the EU at the time of the pounds 20bn taxpayer bailout. But after talks with the Co-operative Bank collapsed a year ago, Lloyds took the alternative route of a stock market flotation, which must now be completed by the end of 2015, or the end of 2016 in extreme circumstances.

A quarter of Lloyds's stake in the specially carved-out branches - former outlets of Cheltenham & Gloucester and other branches in Scotland, England and Wales - is being sold off at this first attempt, which should be completed on 20 June.

Sandy Chen, analyst at Cenkos, said he expected TSB to be priced at the bottom of the 220p to 280p range outlined by Lloyds.

"There is the scent of hubris about, with management and advisers convinced that with the tightly controlled flow of information and the massaging of retail demand, they can push this one through," said Chen. Retail investors are being offered one free share for every 20 they buy, provided that they hold them for a year.

The prospectus shows Lloyds is also helping the newly spun-off bank to become more profitable by handing over an extra pounds 3.4bn of loans, expected to generate pounds 230m of additional profit by 2017.

TSB made profits of pounds 172m last year and does not expect to be generating enough surplus to pay dividends to shareholders until the end of the 2017 financial year -which means the first payments are not likely to be made until May 2018.

The bank's profitability has been held back by its mortgage book, which it admits has low margins relative to rivals as it has a range that is capped at 2%, while the market average is almost 4%. The bank also reveals that 45% of its mortgage customers have interest-only mortgages and that it does not know how some of them intend to repay their loans.

Even so, expansion in the mortgage market is cited as the main area of growth for TSB. The bank will start offering products through brokers again next year, after being forced to end this crucial sales channel while it remained in talks with the Co-op Bank.

The new boss, Paul Pester, whose pounds 1.6m outstanding bonuses from Lloyds are to be transferred to TSB, is also aiming for growth in current accounts, where it has only 4.2% market share despite having some 6% of high street branches. TSB is attracting new customers through its new account offering 5% interest rates.

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Source: Guardian (UK)

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