Having sold 38.5% of TSB (LSE: TSB) in June, Lloyds (LSE: LLOY) confirmed today that it has sold a further 11.5% in the new entity at a price of 280p per share via a placing. This reduces Lloyds’ stake in TSB to 50% and the reason for the sale is to comply with European regulations. They stipulated that Lloyds must divest 631 branches that are now branded as TSB in return for the government’s bail out during the credit crunch.
So, while it is big news, it is not a major surprise and the further sale of Lloyds’ stake had been anticipated. Does it mean, though, that either bank is worth buying right now?
Buoyant Demand
The aspect of the share sale that stands out is the fact that Lloyds did not have to offer a discount to the current market price of 280p. This shows that demand for UK-focused banking stocks remains buoyant and this bodes well for the futures of both TSB and Lloyds.
Of course, this is perhaps unsurprising, since both banks are heavily focused on the UK and that seems to be a good place to offer banking services right now. The IMF recently upgraded the UK’s growth forecast and the UK remains one of the fastest growing economies in the developed world. With a Central Bank that is apparently comfortable in maintaining an ultra-loose monetary policy for as long as is deemed necessary, demand for new loans could increase and write downs may decrease over the medium term.
Turnaround Plan
Furthermore, the sale of TSB shares shows that Lloyds is making good progress with its turnaround plan. This involves selling off assets that it deems to be non-core so as to reduce the size of the bank’s balance sheet and create a leaner and more profitable entity.
Although it may not have chosen to dispose of a stake in TSB (it was forced to under EU regulations in return for receiving government support during the credit crunch) the fact that it is able to do so without offering a discount shows that the market is buying into the strategies and future plans of both banks. This is a major change to a few years ago, when many investors were questioning how Lloyds (which included TSB) could ever return to profitability.
Looking Ahead
Although TSB is not expected to commence dividend payments until 2017, the strength of the UK recovery means that the bank’s share price performance could be strong over the medium term. Meanwhile, Lloyds is set to return to profitability in the current year and grow earnings by an impressive 7% next year.
With investor sentiment being strong and the UK’s economic outlook being upbeat, these two UK-focused banks could see sentiment strengthen even further over the medium term. As a result, they appear to be well-worth buying at current price levels.
