TSB: safe as houses

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Owning banks in a crisis is scary. You don’t know what you’ve got. Those who spent weeks in 2008 seeking the exposure of big banks to housing – a simple matter, surely? – know that a two hundred page filing can leave much to the imagination.

This is not a problem for TSB, the retail bank that will be floated by Lloyds Banking Group in June. It is exposed to one thing, basically: the UK mortgage market. TSB investors, in crisis or boom, will know just what they own, for good or ill.

They may be calmed by the piles of equity capital the bank brings to the market. The company has £23bn of assets – primarily mortgages – and a leverage ratio under 6 per cent, implying equity capital of £1.3bn or more. It claims a fully loaded tier one capital ratio of 17 per cent; Lloyds’ is 10.7 per cent.

Strong capitalisation means safety, low returns on equity, and a low valuation. So one would expect TSB to float near book value, or at a discount. But wait: TSB plans to grow its assets by up to 50 per cent over five years, shrinking that capital cushion and boosting returns. It plans to do so by taking share in the mortgage market. So TSB’s valuation will come in higher to the degree that the market thinks there is room in the mortgage market for profitable growth. Certainly, the market is growing very well now. The Council of Mortgage Lenders reckons gross mortgage lending grew 36 per cent in April from a year ago. Bank of England figures show new mortgage and refinancing approvals growing over 20 per cent for nine straight months – and approvals are still well below pre-crisis highs.

A premium to book value, then? Much depends, unfortunately, on the Bank of England’s attitude. The Bank’s governor says the housing market is the biggest threat to the recovery. He intends to make sure that the market does not overheat. Neither will TSB’s valuation.

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