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 ($2.7 billion).
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 ($2.1 billion).
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.
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.
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 Jo Dickerson.
TSB's focus on growth means it doesn't 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 prospectus for the IPO will be published later on Monday. Final
pricing will be announced on June 20, with initial dealings starting
on the same day.
($1 = 0.5956 British Pounds)
(Additional reporting by Francesco Canepa; Editing by Kate Holton
and Mark Potter)
