Paul Pester may be a triathlon man, but don't expect much action from TBS float

  • @ArmitageJim

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 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 people 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 (William, not Worral)  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 so-called “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 over the next few years in growing the business, but that means no dividends for shareholders 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’s 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% of TSB in this first lump, probably in late June or early July. The British government will then probably sell the remainder of the taxpayers’ stake in Lloyds in the Autumn of this year – that is, if bank-loving  investors  aren’t still suffering from indigestion with TSB.

So, that gives Lloyds a year to sell the remaining £1.25bn 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 its 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% cost, so shareholders should be offered a decent discount to the £1.5bn even before Lloyds’ status as a forced seller is factored in.

The action man Mr Pester was surfing in Newquay the day before launching his float in the City. The swell wasn’t much to write home about, apparently. The valuation of TSB will similarly lowly.