Lloyds, 25% owned by the British government, is obliged by European competition regulators to sell the 631 branches which now form TSB as a condition for their approval of state aid received by the bank during the financial crisis five years ago.
Lloyds had to ask the European Commission to extend an original deadline of November 2013 to the end of 2015 after a planned sale to the Co-operative Bank collapsed, sparking a parliamentary inquiry, and the cost of the entire sale process has risen to £1.6bn.
Banking industry sources expect Lloyds to sell TSB in three or four tranches, just as part state-owned rival Royal Bank of Scotland did with the sale of its Direct Line insurance business.
The initial price reflects a cooling of investor interest in UK company flotations in recent weeks after a rush of activity earlier in 2014. Clothing chain Fat Face pulled its planned London listing last week while shares in insurance-to-holidays firm Saga have fallen below their issue price.
“I am feeling these IPOs (initial public offerings) are starting to grow weary on investors. Bearing in mind Lloyds need to make the disposal as they are obliged, it may be just a case of them making sure it is fully subscribed to,” said Ed Woolfitt, head of sales at stockbroker Galvan.
Lloyds said the shares would be sold at between 220 pence and 290 pence each, valuing TSB at between 0.7 and 0.9 times its book — or net asset — value of £1.6bn.
At the mid-point of the range the business is valued at £1.3bn.
In comparison, Lloyds is currently trading at 1.3 times book value, HSBC at 1.1 times, while Barclays and Royal Bank of Scotland are trading at 0.7 times book value, in part reflecting a legacy of past misconduct.
Oriel Securities analyst Vivek Raja said the valuation reflected weak profitability at TSB, which with& 4.5 million customers and 6 percent of bank branches in the UK, is Britain’s seventh-largest retail bank.
It is hoping to attract investors looking for exposure to Britain’s economic recovery from a bank which is untainted by scandals that have dogged the industry. TSB has agreed an indemnity from Lloyds against historical conduct-related losses, meaning it will not need to pay out for past misconduct such as the mis-selling of loan insurance, which has cost Lloyds £9.8bn.
“It’s going to be a very clean balance sheet so if it comes at a discount to book one would think that’s going to be very attractive,” said Jefferies analyst Jo Dickerson.