It was a long time coming, but Lloyds (LLOY) finally floated TSB (TSB) - or at least 35 per cent of it - last month. TSB, of course, is Lloyds' vehicle for hiving off the 631 branches demanded of it by the European Union competition regulators in 2009 as the price for state support during the financial crisis. Lloyds, however, has given birth to a robust new player, void of the legacy issues which continue to afflict other higher street banks, and which looks well placed to grow amid a recovering UK economy. Yet, crucially, TSB's shares trade below estimates of tangible book value, leaving them looking churlishly rated for the banking sector.
- Solid long-term growth prospects
- Low-risk mortgage book
- Plenty of capital
- Shares cheaply rated for the sector
- No dividend likely for years
- Mortgage book looks low margin
The bank certainly won't suffer from the problems of inadequate scale usually associated with new entrants. It begins life with a branch network that accounts for 6 per cent of the UK's total bank branches and boasts 4.2 per cent of UK current accounts. Indeed, it's already the UK's seventh largest bank and has also been born with an enviably robust loan book. Not only has Lloyds provided the new lender with an indemnity, effectively protecting it from such issues as PPI-type compensation misery, but around three-quarters of TSB's book comprises mortgage loans. They're historically low risk, so the lender's asset quality should be good. Neither is TSB exposed to the vagaries of the interbank funding market: as at end-March, it had £23.3bn of cheap and stable customer deposits funding a total loan book of £23bn.