TSB IPO: Fund managers sound note of caution on sale

on Jun 18, 2014
Updated: Apr 9, 2020

iNVEZZ.com, Wednesday, June 18: The upcoming initial public offering (IPO) of Lloyds Banking Group’s (LON:LLOY) TSB brand has failed to inspire fund managers, the Financial Times has reported. Experts have sounded a note of caution on the challenger bank’s plan to increase its loan book quickly.

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**TSB share sale fails to inspire fund managers**
The FT today quoted several fund managers as sounding a note of caution on the upcoming TSB IPO.
Patrick Barton, portfolio manager at Oriel, the UK fund house, told the newspaper that he was particularly concerned about the bank’s desire to increase the size of its loan book at a rapid pace. TSB’s prospectus, published last week, revealed that as at December 31, 2013, the bank had £23.3 billion of deposits and £19.7 billion of loans and mortgages which it plans to increase by 40-50 percent by 2017.

Barton told the FT that there were a lot of historical examples which showed that “if you try and grow the loan book faster than the market, you inevitably end up getting lower-quality business as your incumbent will try to hold on to the best business”.
The FT also quoted an unnamed financials-focused fund manager as pointing out that the “big question for investors is whether TSB can credibly grow its asset base without taking on too much risk”.

Investor interest in the TSB IPO, however, is believed to have picked up after Bank of England Governor Mark Carney suggested that interest rates could rise sooner than previously thought. With TSB holding more deposits than loans, an interest rate hike is expected to improve the bank’s profitability.
**American investor interest**
City A.M. reported today, without quoting any sources, that American investors were helping to push TSB’s shares towards the top of the price range.

Yesterday, news emerged that Lloyds had tightened its price guidance for the TSB share offer to between 250p and 270p. (TSB IPO: Lloyds narrows price range for listing) Reuters quoted one unnamed source as reporting that the share sale was ‘well-oversubscribed’ within the new range which values the business at a minimum of £1.3 billion, or 0.8 times the bank’s book value.

Shore Capital analyst Gary Greenwood told City A.M. that even at 290p the shares could be undervalued.
“We believe the shares have been priced to go and represent an enticing investment opportunity, even at the top-end of the proposed valuation range,” he said.
While the price range for the float will result in a valuation below the challenger bank’s book value, the pricing is still significantly higher than the £750 million Lloyds would have received for TSB had the sale with Co-op not collapsed. The 25-percent government-owned lender had originally planned to sell the TSB branches to the Co-operative Bank, but the deal fell through following the discovery of a £1.5 billion black hole in Co-op’s balance sheet.


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