Will TSB Survive Life Outside Lloyds Banking Group PLC?

TSBTSB bank has been back on the high street for less than a year, but Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) isn’t hanging about. The part-state owned banking giant is proceeding apace with its plans to spin-off TSB Banking Group PLC as a separate company, ahead of a European Commission deadline to do the deed by 31 December 2015.

While Lloyds says the stock market flotation of TSB — and the publication of the all-important prospectus detailing its financials — will not come until mid-June, it has already given us some insights into TSB’s operations.

Lloyds has also revealed that retail investors (that’s everyday folk like us, as opposed to City institutions) are to be given an incentive to pick up the shares in the initial offering.

But the first question is why put money into TSB shares at all?

Banks, banks, everywhere

After all, it’s not like we’re starved of choice when looking for potential banking investments, with several household names already listed on the London market. Besides Lloyds, there’s HSBC, Barclays and Royal Bank of Scotland.

We also have more exotic options like the big emerging market specialist Standard Chartered, merchant bank Close Brothers Brothers and smaller specialists such as Arbuthnot Banking Group and Paragon.

But what sets TSB apart from these is it’s a new ‘clean’ bank.

You don’t need me to remind you that most of the bigger banks I’ve listed have seen a host of bad debts, scandals and even near-death experiences during the financial crisis.

In contrast, TSB — while a sizeable outfit with 631 branches and 4.5 million customers — should theoretically offer a break with the past for people who want to invest in UK banking, but who don’t want to deal with skeletons rattling around in the closet.

Lloyds’ chief executive António Horta-Osório is well aware this will be the main draw for any new investors in TSB. In announcing its flotation, he highlighted TSB’s “strong balance sheet and significant economic protection against legacy issues”.

And while Paul Pester, chief executive of TSB, drew attention to the growth potential of his born-again bank (he has said it is opening four to five times as many current accounts under TSB than under Lloyds) he also stressed to journalists: “We have a low-risk, simple and clean balance sheet.”

Nobody wants to invest in a ‘new’ bank only to find they’re paying for the sins of the past.

Retail investors get a bonus deal

With an expected value of around £1.5 billion, TSB is certainly far bigger than the other “challenger” banks that have emerged in recent years, such as Metro, Aldermore and Shawbrook. It’s also focused entirely on banking, unlike the more well-funded entrants such as Tesco and Virgin Money.

Will it be worth backing the shares ahead of the flotation? We’ll have to wait for the prospectus for the full financial details, but one incentive is that those private investors who buy into the IPO will be given one free share for every 20 they acquire — up to their first £2,000 — provided they hold those shares for one year after the company floats.

This is effectively a 5% bonus for those who back the flotation, and it will very modestly reduce the risk of investing into the uncertain pricing of an IPO, as opposed to waiting to pick up shares in the aftermarket.

Don’t dismiss Lloyds

Alternatively, perhaps TSB’s float is actually another reason to look at Lloyds?

You see, it’s not selling off TSB because of any fresh difficulties or a need for capital — on the contrary, it is being forced to divest a chunk of its UK business to create a new rival by the European Commission, as a consequence of it taking State Aid in the financial meltdown. Successfully completing a TSB divestment ahead of the end of 2015 deadline will be another milestone in the rehabilitation of Lloyds.

Moreover,Lloyds is forecast to return to full-year profit in 2014, and to resume payment of its dividend. If Lloyds has successfully purged its own closet of skeletons, then there could be a case for buying into Goliath, rather than backing David.

Of course, the financial crisis showed it pays to do your research before investing in banks, so please don't invest merely on the back of this news about TSB. Download our free report to learn more about investing in big, complex banks like Lloyds and understand how to choose between them and newcomers like TSB.

Learn how to understand banks today!

Owain owns shares in HSBC, Lloyds and Tesco. The Motley Fool owns shares in Tesco and Standard Chartered.