- Lloyds floating 25 per cent of TSB
- Lloyds to protect from potential legacy issues
- TSB says no dividend targeted until 2017
- Analysts predict discount to book
Lloyds Banking Group has confirmed it will float a quarter of shares
in TSB on the London Stock Exchange in June and is required to list the entire business by the end of 2015.
Some analysts believe the initial public offer (IPO) will be priced at significantly below book value.
The float is expected to see a take-up of around 15%-20% from retail investors, with a one-for-20 share reward element for those investors who hold their shares for at least 12 months. The prospectus will be published in the middle of June, the bank said, with Lloyds committing to a 90-day lock up period before it sells any more shares.
Lloyds has agreed to protect TSB from any legacy regulatory issues such as PPI mis-selling up until the date of the flotation, with TSB will take on liability once it lists.
Lloyds Chief Executive António Horta-Osório said: "The decision to proceed with an initial public offering of TSB is an important further step for the group as we act to meet our commitments to the European Commission. TSB has a national network of branches, a strong balance sheet and significant economic protection against legacy issues."
TSB, whose 631 branches gives it a 6% market share, has emphasised its plans to pursue a growth strategy, offering a "simple and straightforward" banking model, with plans to grow its retail current account market share from its current 4.2% to nearer 6% and grow its franchise balance sheet by 40-50% over the next five years and to move towards double digit return on equity.
A high proportion of TSB's customer mortgage assets are capped standard variable rate (SVR) products at 2% above the Bank of England base rate, much lower than average rate for the market. TSB believes customers will look over time, and as interest rates rise, to re-mortgage from capped SVR products onto its higher-margin mortgage products.
TSB Chief Executive Paul Pester said: "The TSB we see today is unlike any other UK retail bank: we have the mindset and growth potential of a challenger but with the scale and capabilities of an established player."
On the potential valuation of the bank, Pester added: "We're very different from the large-scale retail banks, who are about paying dividends. We're about growth. We will not be paying a dividend in the early term."
He said TSB did not expect to pay a dividend until the 2017 financial year.
The UK's seventh-largest banking network, TSB has most recently been given a book value by Lloyds of £1.5bn but is predicted to float at less than this value due to the choppy IPO conditions of late, meaning Lloyds is likely to crystallise a loss.
"This is a good step forward for Lloyds," said analyst Ed Salvesen at broker Brewin Dolphin, "however, it is difficult to gain more of an insight until we know more about the valuation. If it is sold at lower than tangible book value, this will be disappointing in terms of the capital position of Lloyds but we do not expect it to change the investment case."
Cenkos analyst Sandy Chen said he believed the IPO would be priced at a "significant" discount to book value due to TSB's growth strategy .
"Our concerns centre on profitability, both current and future - TSB intends to grow its balance sheet by 40-50% over the next five years, mainly emphasising growth in mortgages funded by growth in current accounts. But if this costs TSB 5% deposit teaser rates in order to get those current accounts, we can't see how TSB will make much money with the average two-year fixed rate on 75% LTV mortgages standing at 2.5%."
"TSB's fully-loaded CET1 ratio may be very strong at 17%, but this would be whittled down by losses if TSB does pursue this growth strategy. In the current IPO environment, these prospects wouldn't point to great pricing for the IPO."
Shares in Lloyds were up 1.37% to 77p at 11:00 on Tuesday.