Is TSB Banking Group PLC A Better Pick Than Lloyds Banking Group PLC?

Lloyds’ (LSE: LLOY) (NYSE: LYG.US) much anticipated sale of TSB (LSE: TSB) last month did not go as planned. 

Indeed, it appears that Lloyds was forced to give away TSB and tempt investors with the offer of free shares, in order to sell all the shares it needed to offload.

Shareholders who brought at the IPO were offered one free share for every 20 shares acquired, up to the value of £2,000, if they are held for a year after the float. In addition, to sweeten the deal, Lloyds priced TSB shares at a 17% discount to net asset value. 

However, while TSB shares may have been attractively priced, the bank appears to be a poor investment. Investors might be better sticking with Lloyds. 

Struggling to growLloyds

TSB, at first glance looks like an attractive opportunity. The bank boasts a tier one capital ratio of 21.6% and the discount to book value cannot be sniffed at.  

In comparison, Lloyds reported a tier one capital ratio of just under 11% at the end of the first quarter. This ratio should creep above 11% throughout the rest of this year. 

Still, while TSB does have the stronger balance sheet, the bank could be at risk of overstretching itself. You see, in order to drive growth, TSB’s management has committed to expand the balance sheet by around 40% to 50% per annum over the next few years.

But as the bank targets this rapid rate of growth, there is some concern within the City that TSB could be forced to chase quantity over quality. Loosening lending criteria could leave TSB with a large volume of poor quality loans on its balance sheet.

Meanwhile, Lloyds can afford to use strict lending criteria as the bank is not chasing rapid growth. 

Nevertheless, to attract customers TSB is trying to present itself as a friendly, ‘back to basics’ type of bank. Unfortunately, TSB is not alone as many of its ‘challenger bank’ peers are also using this type of approach.

TSBWork to be done

On the face of it, Lloyds and TSB appear to have gone their separate ways, but in reality the two banks are still joined at the hip. 

TSB still shares Lloyds’ IT system, an integral part of any modern bank. TSB will have to develop its own IT system, for which Lloyds has donated £450m. However, developing a national IT system is not an easy task and there are plenty of things that could go wrong while the system is developed. 

Then there is the income question. TSB is not expected to be in a position to offer a dividend to investors until at least 2018. Lloyds on the other hand is expected to request regulators permission to recommence dividend payouts this year.

Some figures suggest that Lloyds could support a dividend yield of 7% next year.

All in all, it would appear that Lloyds is a better pick than TSB.

Should you buy in?

Still, only you can decided if Lloyds fits in your portfolio and I'd strongly suggest you look a little closer at the company before making any trading decision.

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Rupert does not own any share mentioned within this article.