Lloyds Plans Initial Public Offering for TSB Banking Unit

Photographer: Jason Alden/Bloomberg

Antonio Horta-Osorio, chief executive officer of Lloyds Banking Group Plc. Close

Antonio Horta-Osorio, chief executive officer of Lloyds Banking Group Plc.

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Photographer: Jason Alden/Bloomberg

Antonio Horta-Osorio, chief executive officer of Lloyds Banking Group Plc.

Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, will sell 25 percent of its TSB consumer bank in an initial public offering next month and plans to lure individual investors with bonus shares.

The prospectus will be published in mid-June, the London-based bank said in a statement today. Individual investors buying up to 2,000 pounds ($3,364) of stock will get one free share for every 20 they buy, as long as they hold them for a full year after the IPO.

TSB Chief Executive Officer Paul Pester said there was “strong appetite” for the offering and predicted individual investors will buy as much as 20 percent of the shares on sale. Speaking on a call with reporters, he declined to comment on the lender’s eventual valuation.

The IPO is the biggest by one of the so-called challenger banks that are trying to take on Britain’s four biggest lenders. TSB is going public as demand for IPOs shows signs of waning: last week, retailer Fat Face Group Ltd. pulled its IPO and Saga Plc sold shares at the bottom of the range used to canvas investor interest in the stock.

“This one would need to work for the other challengers to follow,” said David Moss, a portfolio manager at F&C Asset Management Plc in London, which oversees about 82 billion pounds. “This needs to be a litmus test.”

British regulators and politicians are seeking to boost competition in Britain’s consumer banking market, which is dominated by Lloyds, Royal Bank of Scotland Group Plc, Barclays Plc (BARC) and HSBC Holdings Plc. (HSBA) The four banks control about 75 percent of the checking-account market, according to the Office of Fair Trading.

Bank IPOs

That regulatory push is encouraging smaller lenders to raise money for expansion, while Lloyds and RBS are being forced to sell branches by regulators after receiving government bailouts during the financial crisis.

OneSavings Bank, a specialist lender to landlords and small businesses backed by J.C. Flowers & Co., is preparing an IPO. Banco Santander SA is also weighing an IPO of its British operation. European Union regulators are forcing RBS to sell Williams & Glyn, a network of 314 branches, by 2017.

Lloyds had been required by regulators to sell TSB, which it acquired in 1995, by the end of 2013. Co-Operative Bank Plc pulled out of a 700 million-pound deal to buy the operation in April 2013, forcing Lloyds to seek an extension of the deadline.

That deadline and ebbing investor appetite for IPOs may force Lloyds to sell TSB at a discount to its book value, estimated to be about 1.5 billion pounds by analysts at Oriel Securities Ltd.

‘Significant Discount’

“We haven’t been able to see much in terms of numbers yet, but those that were published today make us think that TSB’s IPO might price at a significant discount to book,” Sandy Chen, an analyst at Cenkos Securities Plc in London, said in a report to clients.

Lloyds closed up 1.6 percent to 77.15 pence in London trading today, outpacing the benchmark FTSE 100 Index’s 0.4 percent increase.

TSB “is already operating on the U.K. high street and is proving to be a strong and effective challenger,” Lloyds CEO Antonio Horta-Osorio said in the statement.

TSB has 4.5 million customers and 631 branches, making it the U.K.’s seventh-largest branch network. The lender’s core equity Tier 1 capital ratio, a key measure of financial strength, will be 22 percent under the latest Basel rules.

PPI Claims

TSB will also be protected from “historical conduct-related claims,” according to today’s statement. Lloyds has so far set aside 9.8 billion pounds, more than any other lender, to cover the cost of compensating clients mis-sold payment-protection insurance.

The lender plans to pay its first dividend in 2017. Pester said TSB will increase its balance sheet as much as 50 percent by boosting mortgage lending and expanding its checking-account operation.

“This is a business that we expect investors to buy and hold as we grow,” Pester said on the conference call. “My job is to get out there and explain the bank as it is to both institutional investors and retail investors and let them decide” on the valuation, he said.

JPMorgan Chase & Co., Citigroup Inc., UBS AG, Investec Bank Plc, Numis and RBC are arranging the offering. Rothschild is advising the board of TSB.

To contact the reporters on this story: Sarah Jones in London at sjones35@bloomberg.net; Richard Partington in London at rpartington@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net Keith Campbell

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