Lloyds prices TSB stock market listing below book value
By Matt Scuffham
LONDON (Reuters) - Britain's Lloyds Banking Group has priced the stock market listing of its TSB business at below book value, aiming to attract investors amid a flurry of new issues and make progress on a much-delayed, costly sale.
Lloyds, 25 percent-owned by the government, is obliged by European competition regulators to sell the 631 branches which now form TSB as a condition for their approval of state aid received by the bank during the financial crisis five years ago.
Lloyds had to ask the European Commission to extend an original deadline of November 2013 to the end of 2015 after a planned sale to the Co-operative Bank collapsed, sparking a parliamentary inquiry, and the cost of the entire sale process has risen to 1.6 billion pounds.
Banking industry sources expect Lloyds to sell TSB in three or four tranches, just as part state-owned rival Royal Bank of Scotland did with the sale of its Direct Line insurance business, which was sold off in stages with each tranche priced higher than the previous sale.
The initial price reflects a cooling of investor interest in UK company flotations in recent weeks after a rush of activity earlier in 2014. Clothing chain Fat Face pulled its planned London listing last week while shares in insurance-to-holidays firm Saga have fallen below their issue price.
"I am feeling these IPOs (initial public offerings) are starting to grow weary on investors. Bearing in mind Lloyds need to make the disposal as they are obliged, it may be just a case of them making sure it is fully subscribed to," said Ed Woolfitt, head of sales at stockbroker Galvan.
Lloyds said the shares would be sold at between 220 pence and 290 pence each, valuing TSB at between 0.7 and 0.9 times its book - or net asset - value of 1.6 billion pounds.
At the mid-point of the range the business is valued at 1.3 billion pounds.
In comparison, Lloyds is currently trading at 1.3 times book value, HSBC at 1.1 times, while Barclays and Royal Bank of Scotland are trading at 0.7 times book value, in part reflecting a legacy of past misconduct.
HEAD START
Oriel Securities analyst Vivek Raja said the valuation reflected weak profitability at TSB, which could be explained by its loan book predominantly comprising mortgages from the Cheltenham & Gloucester building society, which Lloyds acquired in 1995. Those mortgages are capped at 2 percent over the base rate compared with a market average of 3.9 percent.
In its IPO prospectus published on Monday, TSB said the business made an underlying profit of 172 million pounds last year, compared with 28 million in 2012 and 57 million in 2011.
TSB has 4.5 million customers and 6 percent of bank branches in the UK, making it Britain's seventh-largest retail bank and giving it a head start over other so-called challenger banks aiming to take on the established industry heavyweights.
It is hoping to attract investors looking for exposure to Britain's economic recovery from a bank which is untainted by scandals that have dogged the industry since the financial crisis. TSB has agreed an indemnity from Lloyds against historical conduct-related losses, meaning it will not need to pay out for past misconduct such as the mis-selling of loan insurance, which has cost Lloyds 9.8 billion pounds.
"It's going to be a very clean balance sheet so if it comes at a discount to book one would think that's going to be very attractive," said Jefferies analyst Joe Dickerson.
TSB's focus on growth means it does not anticipate paying a dividend to shareholders until at least 2017. The bank plans to expand its balance sheet by 40 to 50 percent over the next five years and is targeting a return on equity of 10 percent or more.
The bank said in its prospectus it could eventually pay dividends worth between 40 percent and 60 percent of underlying earnings and would consider acquisitions. It also committed to a "targeted programme of new branch openings" to increase the proportion of Britons living within 2 miles of a TSB branch.
Final pricing will be announced on June 20, with initial dealings starting on the same day.
(Additional reporting by Francesco Canepa; Editing by Kate Holton, Mark Potter and Pravin Char)