TSB shares oversubscribed

With TSB shares oversubscribed tenfold during its debut on Friday, Lloyds Banking Group increased the number of shares on sale for the stock market listing from 125 million to 175 million. Lloyds Banking Group, which is partly owned by British taxpayers, is selling 35% of its shareholding in TSB and not 25% as was originally planned.

At 9.50am GMT today, TSB shares traded at 290.33 on their first day of conditional dealing; at one point they hit 300. Unconditional trading begins next week, on June 25.

There had been speculation that investor fatigue might undermine TSB’s flotation success, especially after the life insurer and cruise operator for the over-50’s SAGA PLC just managed to sell at a rock-bottom price and clothing retailer Fat Face Group Ltd pulled out.

Each TSB share was priced 260p ($4.42), thus initially valuing the bank at £1.3 billion. Small investors get one free share for every 20 they buy up to a maximum purchase of £2,000 ($3,364). However, they will receive no dividends for three years while TSB invests to shore up its balance sheet by 50%.

Lloyds has to sell its TSB stake

Lloyds, the UK’s largest retail bank, was told to float its TSB stake because it was bailed out to the tune of £20 billion ($34.2 billion) in 2008 by British taxpayers. Its remaining TSB stake has to be sold off by the end of 2015. Experts believe it will do so in tranches, much like the mostly government owned Royal Bank of Scotland did with its Direct Line insurance arm.

The Co-operative bank was about to acquire TSB in 2013 until a £1.5 billion black hole was discovered in its finances. Lloyds was supposed to have sold off all its TSB shares by now, but the botched up sale to the Co-operative Bank last year meant its plans had to be re-scheduled.

A “traditional” bank

Paul Pester, TSB’s CEO, says it is a “traditional bank” which uses customers cash to help the economy, rather than filling executives’ pockets with fat bonuses or becoming involved in investment banking. Pester describes TSB as “a force for good.”

The TSB IPO (initial public offering) will be the largest of any challenger bank. A challenger bank is one that is biting at the heels of Britain’s four major high-street banks – Lloyds, Barclays, Royal Bank of Scotland (including NatWest), and HSBC.

With 4.5 million customers, TSB aims to become a major player in the UK’s current account (checking account) market, increasing market share from its current 4.2% to 6% over the next five years.

TSB – an attractive purchase

TSB is an attractive purchase for investors. Its core tier 1 equity ratio will be about 17%, which is far higher than even the most meticulous of the major banks. It was formed in 2013 when Lloyds Banking group spun off 164 Cheltenham & Gloucester and 467 Lloyds branches.

It has also been totally indemnified by Lloyds against future payment protection insurance claims. Its treasure chest has about £20 billion ($33.7 billion) in top-quality mortgages and personal loans.

TSB oversubscribed
TSB shares were ten times oversubscribed.

Pester said he was “delighted with the level of investor demand for TSB’s shares. It shows there is real appetite for a different kind of bank – a High Street bank, not a Wall Street bank – which is focused on customer service. We are now focused on delivering on our strategy of bringing more competition to High Street banking across Britain.”

Today’s successful sell-off is good news for Lloyds and the coalition government in Westminster, making it more likely that the government can part with its remaining 24% stake before next year’s general elections.

Did impending rate hike sentiment help?

TSB’s successful debut was probably partly thanks to the Bank of England’s Governor, Mark Carney, who warned earlier this month that interest rates might go up earlier than expected.

Carney’s remark is seen as helpful for TSB because its profitability would be enhanced if the central bank’s benchmark rate increased from its 0.5% historic low.

In a speech at Mansion House in London on Thursday, June 12, Mr. Carney said a rate increase “could happen sooner than markets currently expect.” Most analysts in the UK media took that to mean that it could happen this year.

Video – TSB shares massively oversubscribed