Is TSB too small to be a Challenger Bank?

TSB Banking Group plc is too small to be a Challenger Bank, British lawmakers have suggested. The “big five” that dominate UK high street banking are just too powerful, they say. Paul Pester, TSB’s CEO disagrees, and says his bank is well equipped to take on the giants.

A challenger bank is one that bites at the heels of the ‘big five’. Since the global financial crisis, many have emerged, including Metro, Tandem and dozens of others.

TSB, which Lloyds Banking Group floated off in June, now has 9.7% of all British customers who either switched accounts or opened new ones.

Lloyds still owns 50% of TSB and will have sold off its remaining stake by the end of 2015.

Mr. Pester said:

“While we have always been clear that we are on a five year journey to grow TSB and its returns, it’s great to see people right across Britain continuing to vote with their feet for TSB’s local banking model.”

“The strong current account performance is one of the factors that has enabled us to grow our customer deposits by £0.5bn to £24.2bn. Meanwhile our plans to enable customers across Britain to buy a TSB mortgage from their local mortgage broker from Q1 2015 remain on track.”

Mr. Pester disagrees with the Committee’s assessment. (Photo: TSB)

According to a Treasury Select Committee report, TSB may struggle to achieve significant growth and become a true challenger in the market. The Committee members pointed out that as a Co-op, TSB would have had 7% of the account market today, rather than the current 4.2%.

Scale is important

Mr. Pester agreed that in retail banking scale is “incredibly important”. He added that if TSB had started off at three or four times its current size, life would have been easier. He emphasized, however, that the company is fully formed “and has everything we need to grow in this market.”

TSB says the slow pace of current account switching in Britain is not helping its plans to increase market share from its current c.4.2% to 6% by 2019.

Although profits in the third quarter (£33.1 million) were 14% below the same quarter in 2013, they had gained by 29% compared to this year’s second quarter.

Customer deposits increased by £500 million to £24.2 billion during the quarter. Loans and advances, on the other hand, contracted by £477 million. TSB is experiencing a fall in home loans because they will not be available through mortgage brokers until the beginning of 2015.

TSB is currently Britain’s seventh largest high street bank. It has been promoting its ‘Classic Plus’ current account, which offers 5% interest per year on balances up to £2000, well above rivals’ rates.

UK regulators are encouraging new or smaller banks to challenge the ‘big five’ – Lloyds, RBS, Barclays, HSBC, and Santander – which control more than 80% of the personal current account market.