Following publication of the official prospectus for the forthcoming flotation of 25% of TSB by the Lloyds Banking Group, Espirito Santo analyst Shailesh Raikundlia has expressed disappointment with TSB’s level of profitability.
In a ‘sell’ note issued today on Lloyds, he pointed out the TSB’s low profitability: “Given the strong capitalisation of the bank, but low profitability, we estimate a return on equity (RoE) of 6.0% in full year 2013 and we expect it to remain flat through to full year 2016 as growing profitability is offset by an increased equity base. Given this return profile we are unsurprised that the IPO range of £1.1bn-£1.45bn falls below the £1.59bn first quarter pro-forma book value.”
He adds that this implies a valuation of price to tangible book value (P/TBV) of 0.7-09 times for TSB.
His conclusion makes grim reading for investors in Lloyds: “Given the valuation range of TSB we continue to believe that Lloyds at 2014 estimated P/TBV of 1.5 times for return on tangible equity of 10.0% remains very expensive for a UK retail dominated business with low lon-term growth prospects.
Interestingly, the note also explains that the TSB float will cost Lloyds “a minimum of £800m” in exceptional charges. This is made up of:
• A charge of between £30m-£110m to reflect the loss on sale of 25% of the business below book;
• A £450m IT dowry;
• The minimum £300m of charges for servicing the long term service agreement at a loss.
TSB & Equity Release
What Is Equity Release?
Equity release is the use of financial arrangements that provide the owner of a house, or other property, with funds derived from the value of the property while enabling them to continue using it.
How Does Equity Release Work?
Equity release is aimed at homeowners aged 55 and over. It allows you to take some of the value of your home as cash.