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TSB shares leap on debut, but are they good value?

(Update) Investors pushed shares in TSB up 12% on their first day of trading but fund manager Chris White questions the valuation.

 
TSB shares leap on debut, but are they good value?

(Update) Investors who subscribed for shares in TSB Banking Group (TSB) got good news today as the shares soared up to 12% on their first day of trading.

Demand from private and institutional investors for the new 'challenger' bank, which is being spun off from Lloyds Banking Group (LLOY), was strong. From a starting point of 260p the shares shot up 37p to 297p, valuing it at £1.4 billion, although they later fell back to 289p.

Some investors have taken heart from the Bank of England's recent warning that interest rates may have to rise this year. They believe this could be good news for TSB, and other mortgage lenders, as it will give them scope to increase the net interest profit margin between their lending and deposit rates.

However, Chris White, the Citywire A-rated manager of the Premier Income and UK Growth funds, is more cautious. He argued the operator of a 631-branch network had an infrastructure and cost base that was far too big for its current level of business, which is why it has a low return on capital.

Of course, the 'bank that likes to say yes' plans to say yes to a lot of mortgages over the next few years. But White's question is, can TSB grow itself profitably?

White (pictured) said: 'The main issue for me is one of valuation. At a price to book of 0.9x and no dividend yield until 2018, the bank does not look compelling value. HSBC [HSBA] will provide investors with a dividend yield of 5% per annum (and growing) over that period, which is quite a head start when considering long-term returns on equities.'

Applications scaled back

Demand for the shares enabled TSB to price the shares at just above the mid-point of the 220p-290p-range it had set. It also meant Lloyds could offload 35% of the bank's shares instead of 25% it originally planned to place. This is good news for Lloyds, which is 25% owned by the government and is under pressure from European regulators to make the disposal in return for the state bailout it received during the 2008 financial crisis.

Some investors' pleasure at the buoyant share price will have been offset by having their applications scaled back, however.

Only investors who applied for up to £2,000 will get their full allotment. For example, a £2,000 investor will receive 769 shares. However, anyone applying over that amount will get 769 shares plus 30% of the excess they applied for over that. This means a £10,000 application will be scaled back to 1,692 shares worth £4,399.

Richard Hunter, head of equities at Hargreaves Lansdown, the stockbroker, said: 'The share offer proved extremely popular so TSB Banking Group scaled back applications. Retail investors have been allocated in full up to £2,000, with some scaling down above that amount, but all have been rewarded by a 12% premium to the offer price in early trade.'

The £1.4 billion valuation is double what would have been gained had Lloyds proceeded with a controversial proposal to sell the network to Co-op Bank. It becomes one of the largest high street ‘challenger banks’ outside the big four with a 6% share of UK retail lending and around two thirds of its mortgage portfolio reportedly consists of capped variable-rate loans which will gain from interest rate rises.

‘TSB has a national network of branches, a strong capital base, robust liquidity and significant economic protection against legacy issues,’ said Lloyds chief executive Antonio Horta-Osorio. ‘It is already operating on the UK high street and is proving to be a strong and effective challenger, further enhancing competition in the UK banking sector.’

11 comments so far. Why not have your say?

Johnill

Jun 20, 2014 at 17:22

Hopefully they will be able to start paying dividends before 2018

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Rob Walker

Jun 21, 2014 at 09:44

Although not mentioned here I would have thought the absence of any history (well, I assume none) ensures there are no skeletons in the closet, so no massive fines in the future for mis-selling, price fixing or other dodgy deals in the past. This in itself makes it a uniquely attractive investment in the financial services industry.

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R Silk

Jun 21, 2014 at 10:02

If demand was so high why did Lloyds scale back Retail investors options above £2000, thats not logical is it ?

If Lloyds under EU law have to sell more, why not do it now especially if there is actual demand…?

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Bazz

Jun 21, 2014 at 11:49

Does anyone know who will get the proceeds of the sale? I am one of millions of Lloyds shareholders who are still sitting on a loss.

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R Silk

Jun 21, 2014 at 12:22

Me too, which is why i hope to offset some of the loss with new shares but it seems the big boys are far more important :(

Small investors just have to keep bearing the losses for the rich and greedy organisations who must be taken care of by the Government with their hidden deals.

I think you should ask Mr Cameron.

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talbot

Jun 21, 2014 at 14:56

No Bazz you are not the only one who is still sitting on a loss my book cost My book cost is £1.86 per share so they have a long way to rise before I see my money back

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it's just weird

Jun 22, 2014 at 11:53

Retail investors' applications were scaled back...we know this.

Does anyone know the position with institutional investors?

Did they get all they wanted, with no scaling back?

We'll remember that with the Royal Mail IPO, retail investors bidding for more than £10,000 got nothing whilst the institutional investors had no cap. they didn't even change the percentage of allocations from 70:30 in favour of institutions despite the overwhelming public demand.

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Pat Murphy

Jun 22, 2014 at 12:30

What's the difference between and TSB and the busted Northern Rock Bank?

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Ian Lees

Jun 23, 2014 at 08:54

Interestingly TSB was introduced through various town deposit taking arrangements - for the poor by minister Henry Duncan ( see henry Duncan House, George Street, Edinburgh ). Those banking with TSB were owners - who were ignored when taken over by initially TSB Group bringing all TSB 's under one TSB BAnk) - and shareholders denied their rights. Then incorporated into LloydsTSB when Edinburgh based bank purchased Lloyds Bank ( See Gordon Browns direct involvement ). Now TSB has been " sold off " to create the illusion of bank competition", Will TSB be a Scottish bank or an English Bank or a UK Bank or a European Bank ? Given the requirement to have " Sufficient Cash " reserves - how can a new bank be realistically capitalised ?

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Sinic

Jun 23, 2014 at 18:50

No dividend, excessive overheads, low profit expectations and the near certainty of ongoing UK and/or EU government interference in the banking sector does little to persuade me that this is anything other than a day traders stock. The only bank that I have a holding in is HSBC and I suspect that will remain the case for many a year.

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Ian Lees

Jun 24, 2014 at 09:24

I see in the National Press that once again LloydsTSB has been caught fiddling more interest rates - again ! Why is it no one at the FCA has intervened or attempted to question these Rogue Bankers ? The consequences are that the various banks held under ( literally ) and the personal intervention of Gordon Brown - guilty of selling off UK Gold reserves - Applying more pensions tax on pension funds - means consumers are being "Ripped Off" at the highest levels - and false claims of a Regulator in the shape currently of the FCA - whose "heid honcho" is only able to insult independent financial advisers - rather than provide any competent regulatory process or regime. Interesting how the fiddling of interest rates at the highest levels - can affect so many ! destroy their savings . . .then the bankers sell one bank bung all the bad debts into one area ( currently HBoS ) to hide these from regulators and the Bank of England and George Osborne . . .nad carry on regardless ! British Banking .. . . .don't you just love it ? No wonder David Cameron welcomes sponsorship from China and their banks for high speed rail . . . . Given the neither Cameron nor Osborne can control British Banks . . .How can he be competent with a Chinese Bank ? It is interesting that UK may get kicked out of Europe thanks to Cameron . . . .whilst Scotland if they get independence can apply for Europe ?

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