Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) today announced it would be selling shares in TSB at between 220p and 290p — and I reckon it presents investors with a great opportunity.
TSB = The Safe Bank
TSB will have a comparatively low-risk balance sheet, consisting primarily of historically low-loss UK retail mortgages, funded by strong and stable customer deposits. The company will also have the strongest capital position of the major UK high-street banks with a core equity tier 1 capital ratio of 17%.
Furthermore, Lloyds is providing TSB with an indemnity against any past misconduct liabilities such as payment protection insurance claims. And Lloyds is also providing an unusual dowry of up to £450m of integration costs should TSB decide to switch away from Lloyds’ technology platform.
Priced to go
TSB will be the ‘cleanest’ bank listed on the stock market, yet Lloyds’ has priced the business at below book (net asset) value. At the 255p mid-point of the range, TSB would be valued at £1.275bn compared with net assets of around £1.6bn — or, 0.8 times book value. Put another way, investors would be paying 80p for every £1 of assets.
The valuation of TSB isn’t much above the car crash that is Royal Bank of Scotland, and is cheaper than HSBC (1.1 times book) and Lloyds itself (1.3 times book).
Why is TSB being priced so cheaply? Well, Lloyds is mandated to sell the 631 branches that form TSB as the price for receiving state aid during the financial crisis. Lloyds is currently selling 25% of the shares in the business, and is required to sell down the rest before 31 December 2015.
Lloyds is keen to get the offer away, and with signs of investor fatigue after a recent spate of flotations, TSB is ‘priced to go’, as they say in the City.
Direct Line all over again?
Royal Bank of Scotland was obliged to sell off Direct Line Insurance (LSE: DLG) for the same reasons as Lloyds is having to sell TSB. Lloyds looks set to go down the same route as RBS, with a priced-to-go initial partial sale of shares, and then the sale of further tranches before the deadline.
The table below shows how the process went with Direct Line.
| Sale date | Share price | % above initial price |
|---|---|---|
| October 2012 (initial price) | 175p | n/a |
| March 2013 | 201p | 15% |
| September 2013 | 210p | 20% |
| February 2014 | 263p | 50% |
I just can’t see TSB trading below book value for long — and if the stock were to re-rate to a similar asset multiple to that of Lloyds, we could see the same kind of share-price uplift as we’ve seen with Direct Line.
What else do investors need to know?
TSB doesn’t anticipate paying a dividend until at least 2017. Management is focused on growth for the time being, intending to expand the balance sheet by up to 50% over the next five years.
The minimum application for retail investors is £750, and, as some recompense for the absence of a dividend, there’ll be one free share for every 20 shares acquired (up to £2,000).
The final pricing of the shares is expected to be announced on or around 20 June; and remember, of course, that there are no sure things when it comes to investing.
