TSB flotation: why its parent Lloyds looks the safer investment

TSB stocks require faith and patience | What's Sainsbury's thinking with Netto? | Hard decisions for GSK in China

TSB stocks require faith and patience

Good luck to those retail investors who piled into TSB's flotation. They made a sound judgment that a forced seller, in this case Lloyds under orders from Brussels, could not afford a flop. On day one, the punters have done nicely. They bought at 260p and the shares traded above 285p all day on Friday.

But let's hope those planning to hang around for their 1-for-20 bonus shares in a year's time read the sale prospectus. If they did, they will have spotted at least four reasons why Lloyds had to price TSB at 17% below net asset value.

First, there's no hope of paying a dividend until 2018. Second, TSB will continue to rely on Lloyds for its IT systems until it can build its own. The parent has gifted £450m for the task, but the process will not be easy. It never is at banks; and non-bank entrants such as Tesco are trying to reinvent retail banking.

Third, TSB needs to grow its loan book by 50% just to make its financial ratios look normal. It has been deliberately over-capitalised to allow a lending blitz but an aim of expanding by 50% in five years carries the obvious risk of saying "yes" to too many loans where the answer should be "no."

Fourth, the current loan book, where interest rates on a large slug of mortgages are capped at 2% above base rates, is horribly low-margin in the current climate. Mark Carney is muttering about the first hike in rates, which would help TSB; on the other hand, the governor of the Bank of England is also saying increases will be "gradual and limited," which would not be so good.

TSB also has a few advantages, of course. It arrives with a shiny guarantee that Lloyds will pick up the bill for any "legacy conduct issues", as the euphemism has it. TSB's cost-to-income is currently so high that it can only fall in time. And maybe chief executive Paul Pester's welcome words about being "a high street bank, not a Wall Street bank," will cut through consumers' inertia about switching accounts.

But this is a stock that requires faith and patience. Normal form is to pay investors to wait in the form of a dividend. Lloyds' shares are pricier judged by book value, but dividends should start to flow next year. The parent, rather than the off-spring, looks the safer investment.

What's Sainsbury's thinking with Netto?

Sir Terry Leahy's parting gift to Tesco was US chain Fresh & Easy, which turned out to be a disaster. Justin King's at Sainsbury's is a joint venture with Netto, the Danish discounter seeking a second run at the UK market after exiting in 2010. A better idea?

It's certainly lower risk, which is a definite plus. Tesco ended up squandering £1.6bn in US before it pulled the plug. Sainsbury's and Netto will each invest £12.5m at launch and expect losses of only £5m-£10m in the first year. There will be 15 Netto-branded stores initially and expansion will only happen if the trading performance is strong.

Fair enough, but Sainsbury's thinking is still odd. If discounters such as Aldi and Lidl represent a real competitive threat, why would you wish to give another entrant a leg-up?

Sainsbury's argues it is seeking a slice of a growing part of the market; it cites forecasts of a doubling in sales at the discount end to £20bn in the next five years. On this characterisation, Sainsbury's is merely placing chips across the food retailing table – traditional supermarkets, convenience stores, home delivery and now discounters.

The trouble is, not all its bets are of equal size. If discounters prosper at the expense of traditional supermarkets, how does that help Sainsbury's? "We find this move by Sainsbury's perplexing, and it will further highlight how expensive the supermarkets are relative to the discounters," argues HSBC's analyst, David McCarthy.

His long-standing advice to mainstream supermarkets is to deal with the discounters by becoming more competitive on price. That has the virtue of simplicity. More to the point, he says it's actually shown to work in France.

Hard decisions for GlaxoSmithKline in China

As Premier Li Keqiang took tea with the Queen this week, government ministers encouraged UK businesses to trade more with China. Mark Reilly may not share the sentiment.

He is GlaxoSmithKline's former country head who finds himself at the centre of allegations by Chinese police that the UK drugs firm operated a corrupt scheme to bribe doctors and hospitals and inflate drug prices. Reilly is not detained but he is not free to leave China.

Chinese prosecutors will decide whether cases against Reilly and several others go to court. Given the high-profile nature of the affair in China – the police called a press conference last month to detail the allegations and the state-owned media has been vocal – it would be amazing if formal charges were not made.

GSK has said it takes the allegations "very seriously" and that "they are deeply concerning to us and contrary to the values of GSK." That is the diplomatic language one would expect at this stage and, eventually, the company will have to give a full account of events.

But it is safe to assume that, whatever happened in GSK's Chinese operation, the company thinks Reilly himself is innocent. He has worked for GSK for 20 years, remains on the payroll and returned to China voluntarily to assist police inquiries.

The wheels of Chinese legal system turn slowly and out of sight. This process has a long way to run and behind-the-scenes political lobbying may also play a role. Asked about the affair during Li's visit, the business secretary, Vince Cable, hinted at the extreme sensitivities. "I raised that particular issue with my Chinese opposite numbers and the points were well taken, they're now in a Chinese legal process and that's understood and we have to respect that." Yes, Chinese officialdom always prefers to be respected. But if Reilly is eventually charged, convicted and imprisoned, and if GSK feels its long-serving employee has been made a scapegoat, there is a hard decision to be made. It would surely be impossible for GSK to send foreign staff to work in China, which might imply a complete pullout.

We need to know Ashley's cut

Weariness among fund managers may mean that, at the fourth attempt, Sports Direct will succeed in getting a bonus scheme for founder and 58% shareholder Mike Ashley. The ruse is to lump the boss in with its all-employee scheme but refuse to say how many shares would be allocated to him. Yet the Association of British Insurers is not giving up easily.
But a disgruntled band wants the proposal to be withdrawn. Its campaign could yet gather momentum before the vote on 2 July. The easy solution is for Sports Direct chairman Keith Hellawell to cough up the information: how many of the 25m shares would be offered to Ashley?

The figure has to be published in the end anyway. Announcing it now might persuade a few waverers to give Ashley what he craves. Being bloody-minded serves no obvious purpose.


Nils Pratley

The GuardianTramp

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