Tesco's bank is not going to worry the big boys yet

Tesco may be the big bad wolf of the high street but its banking operation is scaring no one at the moment.

The retailer that ate Britain reported revenue of £860m, down 9.4 per cent, with pre-tax profits of £114m, hit by a sharp rise in bad debts to £177m. Of course, the figures are complicated by all sorts of messy accounting quirks and cost increases as the company prepares to join the likes of Virgin and National Australia Bank in taking on the big four – as a 100 per cent Tesco-owned venture.

Subject to regulatory approval, new savings products and mortgages are slated for the end of 2010/11, with current accounts to follow in the second half of next year, taking the company from a bits and pieces player (with a notable presence in credit cards) to a full-service retail bank.

Sir Terry Leahy, chief executive, has made quite clear that Tesco will not be joining the bidding battles for the branches being spun off by Lloyds and Royal Bank of Scotland, pointing out that Tesco is hardly in need of distribution. That does not appear to rule out an interest in Northern Rock's good bank, which has only a limited number of branches, primarily in the North-east. It would provide a sizeable customer base in both mortgages and savings with an enviable funding position, no nasty bad debts and a sizeable operation in Newcastle to combine with Tesco's existing centre there.

However, the retailer has previously indicated that it will not be a bidder for Rock either, although it would be no surprise to see it taking a look at the sale documents when the lender is put on the market later this year.

In the meantime, Tesco is concentrating on building its banking business organically, with technical help from Fortis, the Belgian financial services group. But can it really shake up banking by doing this?

Analysts, at least on the banking side, remain sceptical. They point out that Tesco's bank was profitable when it was trading as a joint venture between the retailer and Royal Bank of Scotland. But it was hardly in the heavyweight class.

"It's possible that Tesco will build a viable banking business, building from a low base in a less competitive environment than previously," says Ian Gordon, Exane BNP Paribas's banking analyst, who does not expect the sort of aggressive pricing in mortgages seen pre-credit crunch. "There's business out there... particularly with some of the bigger players shrinking their mortgage books. Tesco could build a viable banking business, but they probably won't really worry the big players."