| LONDON, April 29
LONDON, April 29 Investors will have their pick
of British banks in the next couple of years with up to five
lenders looking to float on the stock market, offering a
potentially lucrative, and nostalgic, punt on high street
A failure to attract buyers from the banking sector means
that state-backed groups Lloyds and Royal Bank of
Scotland are racing to prepare stock market flotations
of hundreds of branches they have been told to sell by European
Their initial public offerings (IPOs) could clash with
existing plans by Spain's Santander and Virgin Money,
the financial group that is part of Richard Branson's empire, as
well as a possible move by National Australia Bank to
float its British businesses.
The higher cost of running banks in the aftermath of the
financial crisis, the complications of integrating IT systems
and staff and the worsening outlook for the British economy have
deterred trade buyers but such factors could help lower the IPO
price, attracting investors.
All five groups - if they list - will be pitched as a 'pure
play' British retail bank without exposure to riskier investment
banking or international markets and without the challenge of
running off large books of soured property loans, which will
remain with the parent group.
"When you look at the returns that most banks today
generate, the returns of the pure retail banking divisions are
quite often the highest returning units of the bigger bank, and
very attractive investments if you can find them on a pure-play
basis," said Richard Black, fund manager at Legal & General
Investment Management, one of the UK's biggest equity investors.
Return on equity (RoE) for core UK retail banking was 24
percent at RBS and 16 percent at Barclays last year, well above
returns of 10 percent for "core" RBS and 8 percent across
Barclays. Lloyds said its core UK retail arm delivered a return
on risk-weighted assets of 3.6 percent, easily its best area and
above 2.6 percent for what it regards its future core.
FRESH START/OLD NAME
All five groups -- Williams & Glyn's, Trustee Savings Bank
(TSB), NAB's Clydesdale, Virgin Money and Santander UK -- could
end up listing in the next 12-36 months, bankers say, breaking a
decade-plus hiatus since the last significant bank IPO of
Bradford & Bingley in 2000.
For at least two of the brands, it would be a chance for
investors to re-engage afresh with an old name.
TSB, which in the 1980s was the self-styled "bank that likes
to say yes", could reappear after being swallowed by Lloyds in
1995. Its roots date back to 1810 and it bulked up by merging
trustee savings banks - which specialised in accepting deposits
- between 1970 and 1985. TSB floated in 1986.
The 630 Lloyds branches designated for sale by Lloyds -
dubbed "Project Verde" - will be rebranded TSB this summer.
If no buyer comes forward, TSB is set to return to Britain's
blue-chip share index in the second half of 2014 after a 20 year
Another name set for a reboot is Williams & Glyn's, which
was last seen in the 1980s before being absorbed by Royal Bank
of Scotland and which will be used for RBS's 312
branches currently dubbed, "Rainbow", which made 305 million
pounds in operating profit last year.
The revival of such brands is no coincidence.
"The Verde proposition plays on the fact that we are in an
environment where most people hate their banks," said Ralph
Brook-Fox, portfolio manager for UK equities at Ignis Asset
"So if you can revive an existing brand that has an element
of trust attached to it, that could be very attractive."
CROWDED SPACE? NOT HISTORICALLY
Between the FTSE 100's formation in 1984 and the financial
crisis there had always been at least six banks among its
constituents and as many as 11 in the late 1990s. Eight to 10
has been the typical number, according to Reuters analysis.
The FTSE 100 only has five banks at present, its
lowest ever number, after Northern Rock, Bradford & Bingley,
Alliance & Leicester and HBOS left during the 2007/08 crisis.
"A few years ago there were several medium-sized banks
listed, so it shows there is an investor universe for them. An
RoE (return on equity) of 15 percent is possible for a focused,
well managed smaller player. That could tempt people to invest,
especially at below book value," one investment banker said.
Santander UK is gearing up for a flotation next year or in
2015, once it has improved its balance sheet and increased
corporate lending, following the path taken by Santander's
Brazil and Mexico operations.
The business, encompassing former building societies Abbey,
Alliance & Leicester and Bradford & Bingley, is likely to be the
biggest of the new arrivals, potentially worth 15-20 billion
pounds. Santander UK made a pretax profit of 1.2 billion pounds
Virgin Money said after its purchase of Northern Rock in
2011 that it wanted to grow and float between 2014 and 2017.
Virgin Money is set to publish its first consolidated results
including Northern Rock next month. In 2011, Virgin Money made
an underlying pretax profit of 44 million pounds but Northern
Rock made an underlying loss of 111 million pounds.
National Australia Bank may also pursue an IPO, bankers said
after several fruitless years spent trying to find a buyer. NAB
UK made a loss of 139 million pounds in the year to
end-September due to losses on bad loans, after a 183 million
pound profit in 2011.
Lloyds has not broken out Verde's profits, but Deutsche Bank
analysts estimated its annual profit at 200 million pounds.
Britain's five big banks trade at 0.9 times book value on
average, but stripping out emerging-market focused HSBC
and Standard Chartered cuts the valuation to an average
of 0.7 times.
Bankers said valuations of new firms will, as ever, dictate
their success, but they also warned there remain a number of
headwinds that could throw the flotions off course.
Separating the operating platforms and IT systems is a big
challenge for RBS and Lloyds; the regulatory landscape and
treatment of capital for new names remains in flux; and none are
likely to list until the British economy perks up.
The threat the government will flood the market with its RBS
and Lloyds shares is also a risk. But on the other hand,
lawmakers may smooth the path for any new banks ahead of the
next general election in 2015 to help lending.
Some of the banks could get snapped up before floating, said
bankers who advise on deals. With several private equity firms
such as J.C. Flowers and WL Ross still sniffing around, a buyer
could even have their eye on combining more than one.
Steve Pateman, head of UK banking at Santander UK, said he
was unconcerned by competition from others for investors.
"Bank valuations are improving in the UK and that will
continue as people get more confidence in the banking sector.
The regulatory environment will be clearer by 2015."