* IPO will create new independent challenger bank
* Lloyds had to sell business as condition of bailout
* TSB wants 6 percent market share in 4 to 5 years
* TSB won't pay dividend until 2017
(Adds comments from TSB Chief Executive)
By Matt Scuffham
LONDON, May 27 Lloyds Banking Group
expects to float about 25 percent of its TSB business on the
London Stock Exchange next month, it said on Tuesday, kicking
off a process regulators hope will create a vibrant challenger
to Britain's dominant high-street lenders.
Lloyds was forced by European regulators to sell the 631
branches which now form TSB as a condition of receiving state
aid during the financial crisis five years ago and it must
therefore now sell the whole of TSB by the end of 2015.
However, the number of shares being sold in the initial offer
is at the bottom end of expectations and banking industry
sources said last week they expect them to be priced at less
than TSB's book value of 1.5 billion pounds ($2.5 billion),
meaning Lloyds will make a loss on the sale of the 200-year old
That reflects a cooling of investor interest in UK company
flotations in recent weeks following a rush of activity earlier
in 2014. Clothing chain Fat Face pulled its planned London
listing last week while holidays-to-insurance firm Saga priced
its IPO at the bottom of its original range.
Lloyds had planned to sell the branches to the Co-operative
Bank but that sale fell through last year when a 1.5
billion-pound funding gap at the Co-op emerged.
It subsequently revived the TSB brand, last seen on British
high streets in the 1990s, with a view to a stockmarket sale.
Lawmakers and banking regulators are keen to see new banks
emerge to break the dominance of Britain's biggest five lenders,
which control more than three quarters of the personal current
account market, and TSB is seen as a viable challenger.
The bank already has 4.5 million customers and 6 percent of
bank branches in the UK, making it Britain's seventh-largest
retail bank and giving it a headstart over other new entrants.
"We have the mindset and growth potential of a challenger
but with the scale and capabilities of an established player,"
Chief Executive Paul Pester said on Tuesday.
However, TSB has only a 4.2 percent share of the personal
current account market and Pester said it would take four to
five years to reach its target of a 6 percent share.
Pester said TSB had picked up more customers than it lost
since the brand was re-introduced to the high street last
"We are a net gainer from every major bank in the UK at
present," he told reporters.
The share sale is expected to be completed by the end of
June, with a prospectus due to be published in just over two
TSB is hoping to attract investors looking for exposure to
Britain's economic recovery from a bank which is untainted by
issues of past misconduct. The bank has agreed an indemnity from
Lloyds against historical conduct-related losses meaning it will
not need to pay out for past misconduct such as the mis-selling
of loan insurance, which has cost Lloyds 9.8 billion pounds.
TSB's focus on growth means that it doesn't anticipate
paying a dividend to shareholders until 2017 at the earliest,
Pester said. The bank plans to expand its balance sheet by 40 to
50 percent over the next five years and is targeting a return on
equity of 10 percent or over. On 31 March 2014 it had 23.3
billion pounds of deposits and 19.7 billion of assets.
The bank plans to attract retail shareholders with an offer
of one free share for every 20 shares acquired in the initial
public offer, up to a maximum investment of 2,000 pounds,
provided they hold them for a year.
Pester said he expected between 15 and 20 percent of the
shares will be sold to retail investors, rather than
institutions such as pension funds and insurers.
JP Morgan and Citigroup are leading the IPO
process. UBS is joint bookrunner
($1=0.5936 British Pounds)
(Additional reporting by Huw Jones; Editing by David Goodman
and Greg Mahlich)