Lloyds has a mountain to climb in shifting TSB for a good price
Jim Armitage is the City editor of The Independent and London Evening Standard group of newspapers. He has been a reporter and editor for more than 20 years and was recently shortlisted for the Press Gazette financial journalist of the year and The Society of Editors financial journalist of the year awards. He contributes news, investigative reports and comment to the Independent titles plus a daily column in the Evening Standard.
Wednesday 28 May 2014
OUTLOOK: Paul Pester is one of those blokes who does extreme triathlon challenges. You know the type: a mountain or two before breakfast then another after tea. But the TSB chief’s attempt to create a fast-enough growing bank to take on the Big Five will be a bigger struggle than the Three Peaks Challenge.
Metro Bank in London, of which – full disclosure here – I am a customer, has all the same messages as TSB. Good customer service, local community involvement, competitive rates. And I have to say, it delivers on all of it. But, four years since its inception, it still only has little over 300,000 customer accounts.
The Metro Bank experience may be only in one part of the country, but it highlights how difficult it is to prise people away from the big banks, even in a densely packed city of 8 million where your marketing message can be widely and cheaply heard. Spread that around the whole of the UK and you get an ever tougher proposition.
Another salutary lesson from Metro is this: its co-founder Anthony Thompson has quit to set up an internet-only bank, recently declaring: “Bank branch usage has fallen off a cliff… all of the explosive growth is in digital and mobile in particular.” In other words, one of the main players in the world of “challenger banks” reckons having a branch network, which TSB cites as one of its unique strengths, is pretty useless.
Mr Pester strongly argues the opposite. The beauty of TSB, he says, is that it has both a large branch network and a strong digital offer, with half a million customers using its online banking app. The truth lies halfway between the two – customers like opening accounts in branches but rarely use them thereafter. But branches are expensive to operate. And with interest rates remaining super-low, profit margins are hard to find. Thanks to a dowry from Lloyds, TSB is investing £200m in growing the business, but that means no dividends until early 2018. Jam tomorrow, then – and we’re not sure how much.
That’s not to say people won’t want to invest in the shares. Lloyds is what is known in the City as a “forced seller” on this one. As such, to attract buyers, it may well opt for a Royal Mail-style valuation, pricing the shares low to go.
Why so? Because Lloyds has to get rid of the whole £1.5bn-worth of TSB by the end of next year under the European edict that ordered the disposal. That may seem a long way off, but it isn’t. Consider this: Lloyds is selling 25 per cent of TSB in this first lump, probably in late June or early July. The Government will then probably sell the remainder of the taxpayers’ stake in Lloyds in the autumn – that is, if bank-loving investors aren’t still suffering from indigestion with TSB. So, that gives Lloyds a year to sell the remaining £1.1bn of shares. Factoring in a few months’ slack for potential stock market jitters – there is a general election, after all – and pretty soon you’re on 2016’s doorstep. Lloyds really has to get the process started soon, and will be prepared to sell TSB cheaply if that’s what is needed.
I used the figure £1.5bn for float, but in reality, even without Lloyds’ unenviable selling position to consider, it will be priced somewhat lower. Here’s why: TSB’s entire equity, or book value, is currently that much. The stock market values banks on the difference between the cost of their equity and the return on equity. If the latter is lower than former, the valuation comes in lower than book value. In TSB’s case, its return on equity is less than its 10 per cent cost, so shareholders should be offered a decent discount to the £1.5bn, even before Lloyds’ status as a forced seller is factored in.
Action man Mr Pester was surfing in Newquay the day before launching his float. The swell wasn’t much to write home about, apparently. The valuation of TSB will be similarly flat. If not, stay away.
Metro co-founder may be gambling on investments
The Metro co-founder Anthony Thompson has been dripping titbits of information into the market about his new Atom challenger bank over the past year or so. The occasional hire of a new team member here and there. Earlier this month he hired David McCarthy, former finance director of, ahem, Britannia. That’s right, the bank that sucked the Co-op Bank to the brink of disaster with its duff loans, including those in the Platform mortgage business, where Mr McCarthy was also a director.
Companies House records show Mr Thompson has also hired John Deane – another mutual financial services big-hitter. Once seen as a contender to become chief executive of Royal London, the actuary was reshuffled out of the investment manager in 2012. Could his involvement signal Atom is going to be running investments as well as straight banking products? Tell us, Anthony.
Here’s hoping M&S man will be an effective gatekeeper
Congratulations to M&S chairman Robert Swannell for landing the tricky post of chairman of the Shareholder Executive – the body that looks after taxpayers’ shareholdings in state-owned businesses such as Channel 4. He has spent a lifetime in the City as an investment banker. He was also chairman of HMV but we’ll forgive him that. The question is, will he be able to stop us getting legged over with bad City advice as happened with Royal Mail and Qinetiq, or will it suffer from the same myopia that existed under Patrick O’Sullivan, another City veteran? With big privatisations like the Urenco nuclear fuel enrichment company looming, let’s hope for the former.
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