A few days from now we will find out what investor appetite there is for a new challenger bank as Lloyds Banking Group seeks to spin off its branch network under the TSB brand as it seeks to comply with EU mandated conditions as a result of its takeover of HBOS in 2008. Having seen its initial attempt to sell off branches to the Co-op fall flat on its face last year Lloyds has decided to take its chances with this year’s once buoyant IPO market. The timing of it could hardly have been worse as the recent appetite for IPO’s appears to be waning, and the launch of new current account services by Marks and Spencer, Tesco, and the Post Office, ramps up the competitive nature of the UK retail banking sector. In order to build a stable shareholder base TSB plans to offer one bonus share for every 20 shares bought, up to a value of £2,000 if held for more than a year. The initial valuation has been set either side of £1.3bn (mid-price 255p) less than the estimated £1.5bn value of its book, with a share price window of 220p to 290p, with expectations that any final valuation is likely to come in at the bottom end of that window, when shares start trading on 20th June. Given that Lloyds were looking to sell this similar stake to the Co-op for £750m, only a few months ago it seems rather bizarre they are now looking to sell at a premium to that price, at a time when small investor demand remains fragile, and the need for the disposal to get done remains even more pressing. The time factor is important given that Royal Bank of Scotland also needs to spin off a number of its branches to comply with the same EU rules, while the possibility of Virgin Money and Metro Bank looking to IPO could well add to any competitive mix in the future. While time would appear to be of the essence here the concern remains that demand for the shares may well be constrained by the fact that recent demand for IPO’s appear to be showing some signs of waning, along with some concern about the banks’ future ability to generate consistent profits growth over the next few years. This concern is multi-faceted but in part stems from the fact that a large number of its customers have “interest only” mortgages with no clear idea of how the principal will be paid back. This exposure is a concern and for a bank that claims that its main area of growth is going to be in the mortgage market, could be a drag on profitability in the event of a rise in interest rates in the next eighteen months. This exposure to that market could help explain why Lloyds is handing over an additional £3.4bn of loans that are expected to generate an extra 7% of profit in the next three years. Increased competition is also a concern with Tesco launching its new on-line current account service, following in the footsteps of Marks and Spencer last month as supermarkets look at creating a banking service, with discounts tailored to individual customers shopping habits. Given that Tesco has 17m customers the potential for long term growth here remains real, particularly if the company uses its Clubcard rewards scheme to offer discounts to new current account signups. Amongst the things in TSB’s favour are its customer base of 4.5m, making it the seventh largest retail bank in the UK, as well as the indemnity given to it by Lloyds against future legacy misconduct charges as a result of the financial crisis and mis-selling. Ultimately the IPO’s success or failure will depend on pricing and allocation and after so many false starts the bank’s management really can’t afford to get this one wrong, unfortunately their timing could not have been worse, and it probably makes this IPO a risky one for the small investor which suggests the pricing could well come in at the low end of expectations. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.