TSB: Will this one-trick pony give trusting investors a kick in the teeth?


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The Independent Online

OUTLOOK: Is TSB a model bank? The sort of UK-only supporter of homebuyers, savers and small businesses we’d all like banks to become?

That’s the subliminal sales pitch. The company even claimed to have drawn inspiration from the sainted John Lewis Partnership when setting its chief executive’s pay (although Paul Pester could still make £1.6m – he is a banker, after all).

And it’s apparently on the market for a song. If the shares come in at the mid-point of the range set yesterday, the company would be worth a smidgeon under £1.3bn when set against a “book” value of £1.6bn.

But are they really the bargains this apparently makes them?

The bank admitted in its prospectus that fully 45 per cent of its home loans are interest-only mortgages.

That is an astonishingly high number, given that the overall figure for the market is just 25 per cent (a figure including some loans that are only part-interest only).

These loans are highly risky, given that borrowers may not have the money available when the time comes to repay the capital. They have certainly been worrying regulators, and with good reason. The number is particularly troublesome for TSB, given that it will be relatively small.

While the idea of simple banking is seductive, simple TSB will be something of  a one-trick pony. Moreover, one reliant, as we know, on Lloyds for its IT infrastructure and much else besides. Of course, if TSB is a one-trick pony then so is Nationwide, which, as a mutual, doesn’t have the ability to issue new shares if it runs into trouble. 

But the proportion of interest-only loans on its books is less than half of that of TSB. Moreover, it’s bigger, it doesn’t have to pay dividends, and now it has proven its ability to raise capital through a new form of bond, regulators needn’t be too worried about it.

There are a lot of people who want TSB to succeed as a “challenger” bank, people who are invested in this float spiritually if not financially. But there were a lot of people who wanted Co-op to succeed as a challenger bank by buying the business that has now become TSB. We all know how that went.

TSB does, of course, have the benefit of being clear of any legacy issues, such as payment protection insurance or interest rate swaps mis-selling. It is basically backed by Lloyds and looks a world away from, say, Northern Rock, another, apparently simple, retail bank that was something altogether more frightening, given its suicidal reliance on international money markets for funding.

Still, financial regulators would be best advised to assign TSB to sharper teams than the one at the Financial Services Authority that was overseeing the Rock alongside  a bunch of insurance companies.

And as for the price of the shares? Lloyds is looking to get far more than it was expecting through selling TSB to Co-op. The economy may have improved since then, but there are increasing fears that the housing market is in the midst of an unsustainable bubble and rumours that regulators will demand yet more cash calls from banks. Buyers beware.