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How I’d handle Tesco’s shares following this recent news

Yesterday, Tesco (LSE: TSCO) announced plans to cease mortgage lending through its Tesco Personal Finance division and to “explore” the potential sale of its mortgage business.

The firm wants out of the market, which isn’t that surprising given that we’ve been hearing reports from other mortgage providers lately, such as Lloyds Banking Group, about how competitive the mortgage business has become. There isn’t much money in it any more, which I reckon reads across to other shareholdings we might have such as in Lloyds Banking Group and others.

Mortgages were nothing special anyway

To me, providing mortgages looks like another commodity-style pursuit with precious little to differentiate between one provider’s offering and another’s. There’s also a lot of cyclicality inherent in it, and one decent general economic slump or a crash in the housing market could wreak havoc in the sector for those companies engaged in the business of supplying mortgages.

Tesco Bank has offered mortgages since 2012 and has more than 23,000 customers who between them have outstanding mortgage borrowings of some £3.7bn. But it’s aiming to get shot of the lot including the complete transfer of related balances and ongoing administration of relevant accounts.” At this stage, of course, there’s no certainty that a deal will happen because Tesco has yet to find a buyer.

It seems that Tesco Bank could be shrinking back activities, just like the mother business has been. There was a time when it looked like Tesco would take over the world and the firm’s banking activities are a good example of how it was pushing beyond its grocer roots as well as expanding into other countries.

A challenging long-term backdrop

But as has been well reported, the core UK supermarket business has suffered from much upheaval in the sector over recent years, brought on by a new wave of super-discounting competition exemplified by the likes of Aldi and Lidl. But they aren’t the only firms nibbling into the big supermarket companies’ market shares, there are many others too. I think the upsurge in competition caught Tesco in a state of complacency about its home market in the UK. After all, the firm had been posting record-breaking profits for some time. The directors seemed to have their attention on the unravelling foreign expansion programme at the time.

Lately, we’ve seen the company making something of a recovery under chief executive Dave Lewis, but I don’t believe Tesco will ever be looking like it’s taking over the world again. The business is too, well, naff really. Low margin, me-too, commodity-style products and services will never make a great business ideal for backing up shares for the long term, in my view.

I’ve thought for some time that the most likely outcome for Tesco over the fullness of time will be a process of managed contraction, and yesterday’s news adds just a little bit more weight to my conviction. I’m avoiding Tesco shares.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.