Should you buy shares in TSB?

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TSB Bank stock market flotation

As Lloyds presses ahead with plans to hive off TSB, we ask whether TSB shares are worth banking on.

The past six months have seen a succession of British businesses rush to list their shares on the London Stock Exchange.

The biggest public offering so far was the highly successful float of Royal Mail last October, which delivered bumper gains to its new owners from day one. Recently, over-50s group Saga has hit the stock market.

Next up is the listing of TSB Bank, the banking brand owned by Lloyds Banking Group. Lloyds expects to float TSB on or around 20th June, but will these shares be a steal, as Royal Mail's were?

A short history of TSB
Before buying any company's shares, you must first get to know the underlying business. With that in mind, here's a potted history of TSB:

TSB – previously an acronym for Trustee Savings Bank – was formed in 1985 when a series of small, mutually-owned banks came together to create TSB Group PLC, which was later floated on the London Stock Exchange. A decade later it was taken over by Lloyds, with TSB essentially disappearing until after the global financial crisis, during which time Lloyds was bailed out by £17.4 billion of taxpayers' money.

As a condition of this state aid, the European Commission (EC) instructed Lloyds to shrink its business through a sale or split.

For this reason, the bank revived the TSB brand and put it up for sale. Today, TSB composes 631 branches, 4.5 million customers, 113,000 small business clients and associated assets. Co-op Bank was the business most interested in buying TSB, but the mutual pulled out almost exactly a year ago when it was unable to meet the proposed £750 million price tag.

Following this, the new TSB Bank began trading in September 2013 and this entity is what Lloyds is now offering for sale. Initially, the bank expects to sell at least a quarter (25%) of TSB, with the remaining shareholding to be offloaded by late next year.

Shares for sale
As is often the case in major IPOs (initial public offerings), Lloyds will offer TSB shares to the general public, as well as to institutional and professional investors.

With an initial price range of between 220p and 290p, these shares are priced to sell and wisely so. After all, TSB will be a new 'challenger bank' competing for the crumbs from the table of Barclays, HSBC, Royal Bank of Scotland and Lloyds itself. Since this quartet controls about 80% of retail and business banking, TSB will be on the back foot from day one.

On the other hand, the old TSB had a hard-won reputation for friendly and efficient service, so it may yet have its supporters, especially among those disillusioned with banks associated with bailouts and big bonuses.

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TSB is not for me

You have to ask whether you should increase your exposure to banking shares. After all, the big four banks have a combined market value of £232 billion, which is an eighth (12.5%) of the FTSE 100's total market capitalisation of £1,862 billion. In short, you may already have a sizeable proportion of your portfolio tied up in British banking.

What's more, with the OECD (Organisation for Economic Co-operation and Development) think-tank warning of a growing housing bubble in Britain's property market, perhaps now isn't the time to pump more of your hard-earned savings into banks. In addition, with basic, everyday banking an increasingly low-margin business, challenger banks could face tough times to come.

TSB has now been valued at up to £1.45 billion, which is much smaller than any of the Big Four. How will a FTSE 250 bank compete effectively with mega-cap rivals? The answer is it won't, so I won't be putting my money into TSB.

What do you think? Will you be buying shares in TSB? Let us know in the comments box below.

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