View the article online at http://citywire.co.uk/money/article/a757881
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.
(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.’
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