TSB is the bank governments (EU & UK) and regulators built – not necessarily by choice, but that is history. This is no small part of why investors are having trouble valuing a bank that appears soundly capitalised yet poorly profitable. Not so much a Dr Frankenstein bank, it is at the same time perhaps Britain’s prettiest and ugliest major bank in terms of safety and performance. Yet a valuation discussion based upon profitability and return misses the point about TSB. Investing in TSB is about M&A speculation. TSB is the ultimate ‘commodity’ product bank in a very commoditised market yet it is without scale (only 4-6% market shares in key products that are not growing). There is certainly room for niche players in Britain’s bank market, but in commoditised markets only the largest players have a chance at decent profitability and returns. Players like the new TSB are usually hoovered up by equals or larger competitors, as the original TSB many years ago was acquired by Lloyds. TSB’s IPO asks the big question about who is going to be the next bank consolidator in the UK and, of course, at what prices this will occur? Will it be TSB or will TSB be acquired?
National Australia Bank’s UK business (Clydesdale) and the Royal Bank carve-out to come (Williams & Glyn’s) have even smaller market shares than TSB with the former probably desperate to get out of the UK and the latter perhaps moving in the direction of consolidation if it is ever spun-out of RBS. But banking isn’t a normal corporate finance consolidation example, regulators call the shots. More than regulators, there aren’t a lot of potential TSB bidders for shareholders to be optimistic. The largest banks won’t be allowed to get bigger, there are no peers with equal market share and foreign banks won’t want to be locked into a minor market share regardless of the price — as NAB has learnt. So for now TSB, with its systems dependent on Lloyds and no M&A experience, looks like bait for a smaller bank that might want to ‘unlock’ some of its excess equity at a very knock down price. At some price TSB may be an investment, but I hope my pension fund doesn’t rush in.