Despite the improved earnings, shares in TSB are flat today, which indicates that the upbeat results are priced in. As such, is there greater scope for a significant return with Standard Chartered (LSE: STAN)? Or, is TSB a better buy?

Takeover

Clearly, the present time is a rather uncertain one for investors in TSB. That’s because it is currently the subject of a £1.7bn takeover approach by Spanish bank, Banco de Sabadell. As such, if the deal does come off then there is little scope for share price gains, since TSB is currently trading close to the offer price.

However, there are no guarantees that the takeover will complete, since authorisation is required from multiple regulators including the Prudential Regulation Authority and the European Commission. As such, and while TSB is making good progress in establishing itself as a standalone entity (as today’s results highlight), there is significant downside risk if the takeover does not complete, with the current bid premium likely to be erased. And, with its shares trading just 5p lower than the 340p per share offer price, there is very limited upside, too.

A Turnaround Play

Therefore, it seems logical to look elsewhere in the banking sector at the present time. And, with its shares having fallen by 17% in the last year, Standard Chartered appears to offer excellent value for money. For example, it currently trades on a price to book (P/B) ratio of just 0.85, and this indicates that its share price could move significantly higher. Certainly, Standard Chartered is forecast to post a fall in earnings of 2% this year, but is expected to bounce back strongly with 15% growth next year. That’s twice the rate of growth of the wider index and makes its current valuation difficult to justify.

Looking Ahead

Although the UK economy is going from strength to strength at the moment, there is considerably more potential in Asia for the banking sector. For example, China is currently transitioning from a capital expenditure-led economy to one focused on consumer spending, which means that consumer credit is likely to rise significantly over the medium to long term.

And, while demand for new loans in the UK remains high due to low interest rates, they will inevitably have to rise, which means that Standard Chartered’s current growth rate could last, while UK-focused TSB’s may falter as the macroeconomic outlook shifts to a more ‘normal’ situation. As such, Standard Chartered appears to be the stronger long term buy of the two banks.

The post Is TSB Banking Group PLC A Better Buy Than Standard Chartered PLC? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Standard Chartered. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

TSB’s largest shareholder, Lloyds (LSE: LLOY), also stated its commitment to the deal. Lloyds has agreed to sell a 9.99% interest in TSB to Sabadell, and the group has entered into an irrevocable undertaking to accept the offer in respect of its entire remaining 40.01% shareholding in TSB. 

A clean break

This deal will allow Lloyds to make a clean break from TSB, although it seems as if the bank will lose out financially.  

Lloyds is set to receive £170m for its 9.99% stake in TSB on 24 March, followed by a further transaction of £680m for Lloyds’ remaining TSB stake. The total cash consideration Lloyds could receive from the deal is £850m, which will be used by the bank for general corporate purposes.  

Unfortunately, according to today’s press release on the matter, the transaction will lead to a separation charge on Lloyds’ income statement of approximately £640m. Additionally, on the completion of the deal, Lloyds’ equity tier 1 capital ratio — capital cushion — will fall by an estimated 0.27% as costs of the deal outweigh the benefits. 

Nevertheless, for TSB shareholders the deal is great news.  Indeed, TSB’s shareholders will receive 340p in cash for their shareholding, while still qualifying for the bonus share scheme implemented by Lloyds when it floated TSB in June last year. The 12 month lock up period for the bonus scheme ends on 25 June, when Lloyds will make arrangements to pay, any investors who would have been entitled to receive bonus shares under the terms of the scheme, the cash value of those bonus shares at the offer price to be paid by Sabadell. 

So, as well as the transaction costs, it looks as if Lloyds will lose money from the bonus share scheme as well. The cash payments appear to be coming from the bank’s own back pocket. 

But there’s still a chance that the TSB-Sabadell deal will be blocked by regulators. Until the transaction is approved, it’s not time to celebrate. 

The bottom line

All in all, it looks like Lloyds won’t see any benefits from the TSB-Sabadell deal. However, the deal will allow the bank to make a ‘clean break’ from its smaller spin-off, which is a suitable compromise.

The post Is Lloyds Banking Group PLC Set To Benefit From TSB Banking Group PLC’s Takeover? appeared first on The Twelfth Magpie.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

A Win-Win? 

All sort of bad news has swirled around Quindell in recent months, but it looks a lot like those who invested at the bottom of its valuation range in December may have the last laugh. Apparently, the same applies to TSB shareholders. Or does it? 

Enter Banco Sabadell, a Catalonia-based bank with a strong regional focus. It has bought lots of distressed assets since the onset of the credit crisis, and has become a stronger financial institution, but it still has one big problem: its assets base is not properly diversified. So, TSB has become Sabadell’s preferred investment to chase non-organic growth abroad. The Spanish bank will likely have to issue expensive equity capital to acquire TSB for £1.7bn, which is the reason why its shares have plunged more than 10% since the proposal was announced. 

While you may argue that TSB shareholders would be better off if the bank was bought by its Spanish suitor, it remains unclear why the UK government would want Sabadell to lead the show domestically and start competing with other retail banks. Analysts have also argued that political risk could prevent a deal from happening, adding that Sabadell may be asked to ring-fence part of the capital and the assets of the combined entity, while targeting low cost savings, among other things.

Will Tesco Bank Bid Up For TSB? 

What I know is that if TSB became part of Sabadell, it would give up paying taxes to the UK government, and that’s a good enough reason to doubt that the deal would go through. Business Secretary Vince Cable pointed out that Banco Sabadell could boost small business lending, but I don’t buy into that argument.

Surely, it would be a great opportunity for Lloyds to cash in on its residual stake in TSB at a high price.

What are the alternatives, though?

Sabadell is a chronic underperformer, with its stock down 36% in the last five years. If I were a TSB shareholder, I would have certainly preferred to become part of the Tesco family — a tie-up with Tesco Bank would make a lot of sense strategically and economically — by receiving a cash-and-stock offer. After all, TSB could be an attractive long-term play on retail banking in the UK. 

The issue here is that Tesco must be careful in managing its finances, and needs divestment more than acquisitions. Well, Tesco Bank doesn’t seem to be very serious about growing its business, anyway, as its track record in the last decade shows. 

Quindell’s Risk Profile Heightens

Talking about companies that may disappoint investors, let’s move on to Quindell, which has come under the M&A spotlight once again this week. 

Quindell shares rose above 120p on Monday following takeover chatter, according to which Australia’s law firm Slater & Gordon would buy Quindell’s legal services division for more than £600m, valuing the stock above 140p a share. I reiterate the view that Quindell remains a very speculative bet and, at its current valuation, for me it’s not a risk worth taking. Forget about trading multiples, which might point to value: they mean very little right now. 

It’s hard to draw parallels with TSB, of course, but if things do not work according to plan, both Quindell and TSB shareholders may have to nurse big losses. The big difference is that TSB may be a risk worth taking, while in my opinion Quindell is not.

The post Are TSB Banking Group PLC And Quindell PLC Any Different? appeared first on The Twelfth Magpie.

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Banco de Sabadell is TSB’s suitor, and the Spanish lender has already approached the board of Lloyds Banking Group — which still holds 50% of TSB — to make an offer for its remaining share of TSB. 

Lloyds is required to divest its remaining share in TSB by the end of this year. An offer from the Spanish bank would allow Lloyds to make a ‘clean break’ from its smaller spin-off. 

Sabadell is offering 340p per share in cash for TSB, and management has already indicated to Sabadell that it would be willing to recommend this offer at the proposed price. 

However, the approach from Sabadell is only “a preliminary proposal“, which “may or may not result in a formal offer for the entire share capital of the Company.”

According to the City takeover code, Sabadell is required to announce a firm intention to make an offer for TSB by 5:00pm on 9 April. Or The Spanish lender is required to announce that it does not intend to make an offer for the company. 

Merger synergies

Sabadell is one is Spain’s strongest banking groups, and a merger between the Spanish lender and TSB doesn’t look to be such a bad idea. Sabadell is the fourth-largest private banking group in Spain with multiple banks, brands, subsidiaries and part-owned companies covering all areas of the financial business sector united under one brand. 

Moreover, for the year ending 2014 Sabadell reported a tier one capital ratio — financial cushion — of 11.7%, which is better than many of the UK’s largest banks.

And according to TSB’s press release on the matter, TSB’s management believe that a merger with Sabadell could help improve the UK bank’s growth rate:

“Based on preliminary discussions, the Board of TSB believes that Sabadell could support and accelerate TSB’s retail growth strategy and accelerate the expansion of TSB’s presence in the SME sector…Sabadell is a strong competitor in its home market and has developed a successful international presence in the US…Sabadell anticipates that under its ownership, TSB would be able to further enhance its growth strategy and efficiency, benefitting from Sabadell’s resources, experience gained in the Spanish banking market…”

Sabadell specialises in SME lending, and TSB is trying to increase the size of its loan book here in the UK by 30% to 50%. Sabadell’s experience would come in handy when trying to achieve this goal. So a merger between Sabadell and TSB would be beneficial for both parties.  

Still, as TSB noted within this morning’s press release, there’s no guarantee that a deal between the two banks will go ahead, and for this reason alone I would stay away. You could end up paying a high price for TSB’s shares only to see the deal fall apart.

The post TSB Banking Group PLC Surges 25% On Takeover Talks appeared first on The Twelfth Magpie.

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What’s more, consumers are increasingly turning their backs on big banks favouring smaller, challenger banks instead.

The largest public challenger banks in the UK are Secure Trust Bank (LSE: STB), Arbuthnot Banking (LSE: ARBB), Virgin Money (LSE: VM), OneSavings (LSE: OSB) and TSB Banking (LSE: TSB).

All five of these banks are reporting rapid growth and look to be better investments than their larger peers. 

Rapid growth 

Arbuthnot Banking is a holding company for Secure Trust Bank and the Arbuthnot Latham private bank.

Secure Trust is a pure retail banking play and consumer seem to be attracted to the bank’s offering — lending volumes expanded 75% during 2014.

On ‘Black Friday’ the bank saw a 1300% in retail finance applications and 600% increase in new business written compared to the year-ago period.

And thanks to these impressive rates of growth the City expects Secure Trust’s pre-tax profit to expand 61% over the next two years. At present the bank is trading at a forward P/E of 16.4, based on predicted 2015 earnings. 

As mentioned above, Secure Trust is part of the Arbuthnot banking group. As well as Secure Trust, Arbuthnot operates a private bank, which when combined with Secure Trust becomes a formidable force in the banking industry. The group’s pre-tax profit for the first half of 2014 jumped 368%. Profits at the private bank rose 70%. 

If you’re looking to invest in Secure Trust but don’t want to pay a high price, Arbuthnot could be a better bet. The group is currently trading at a forward P/E of 15.7 for 2015, falling to 12.5 for 2016. EPS growth of around 30% per annum is expected for the next two years. 

GARP

Like the Arbuthnot group, Virgin Money is also growing rapidly. According to City figures, the bank’s shares are currently priced at a level that offers growth at a reasonable price.  

Indeed, the City expects the company to report EPS of 21.9p for 2015, which implies that Virgin Money is currently trading at a forward P/E of 14.4. Additionally, City analysts expect the bank’s EPS to jump by 52% during 2016.

On that basis, the shares are currently trading at a PEG ratio of 0.2 showing that Virgin Money is severely undervalued based on its projected growth. 

No contest

Unfortunately, while TSB’s smaller peers are charging ahead, TSB is struggling. 

As it completes the separation from parent Lloyds, TSB’s costs are rising and as a result, the bank’s EPS are set to fall 44% during 2015. However, TSB is expected to return to growth during 2016, when analysts expect the company to report EPS growth of 50%.

Nevertheless, considering the fact that TSB’s EPS are set to slide this year, the bank’s valuation of 20.2 times forward earnings seems excessive. 

Bargain valuation 

OneSavings Bank is by far the cheapest play on the challenger bank sector. 

And with a return on equity of 30% reported for the first half of 2014, it’s difficult to see why. Underlying profit before tax jumped by 400% year on year for the six months ended 30 June 2014. These figures show that OneSavings is certainly one of the banking sector’s better picks. 

According to current figures, OneSavings is currently trading at a forward P/E of 9.2. Analysts expect the bank’s EPS to expand 14% during 2016 and on this basis the bank is currently trading at a 2016 P/E of 8.1. OneSavings is expected to offer a dividend of 6.3p per share to investors this year — a yield of 2.8% at current levels. 

The post As Profits Surge, Is It Time To Buy The Challenger Banks? Secure Trust Bank Plc, Arbuthnot Banking Group Plc, Virgin Money Holdings (UK) PLC, OneSavings Bank PLC & TSB Banking Group PLC appeared first on The Twelfth Magpie.

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Since TSB listed on the FTSE in June 2014 with a free float of 38.5% of its equity, its share price has lost 8% to today’s 260p — over the same period Lloyds shares have picked up less than 0.5% to 78p, although since the depths of 2011 Lloyds is up 230%.

Shortly after flotation, TSB reported an underlying £78.6m pre-tax profit for the six months to 30 June, with chief executive Paul Pester describing the period as “a strong six months for TSB Banking Group” and saying that customers had reacted well to “TSB’s ‘local banking’ model“.

Long haul

The third quarter brought in an underlying pre-tax profit of £41.6m, up 31.6% on the equivalent business a year previously, and TSB reported a fully-loaded CET1 Capital ratio of 18.8%, which is very strong. Mr Pester reminded us that the company is “on a five year journey to grow TSB and its returns“, so it’s hard to put any accurate valuation on TSB shares right now.

Meanwhile, back at Lloyds, we’re awaiting full-year results on Friday, 27 February.

We’ve had a pretty good recovery since those bailout days, with Lloyd recording a small pre-tax profit in 2013. We should be back to more serious profits for 2014, and most analysts are expecting Lloyds to pay its first dividend since the crisis.

Dividend back?

The dividend is only expected to come in at around 1p per share for a yield of 1.3%, and it will require final approval from the Prudential Regulatory Authority (PRA) — Lloyds has already presented its results to the PRA, but is unlikely to know if it has permission for its modest cash-return proposal until the couple of days before the results are published.

The dividend should ramp up pretty quickly, with the City already predicting a yield of 3.8% for the current year followed by 5.5% for 2016. That puts Lloyds shares on forward P/E ratings of under 10 — as low as 9.2 for 2016, in fact.

Better value?

The combination of faster recovery, imminent dividends and low P/E multiples makes Lloyds still my favourite of the bailed-out banks — it looks better value to me than its ex-TSB arm, and better than Royal Bank of Scotland which is about a year behind Lloyds’ recovery schedule.

Lloyds shares are actually down 6.6% over the past 12 months, and I can’t help thinking we’re looking at a buying opportunity now — the shares could start to firm up once we’re sure about that dividend.

The post What To Expect From Lloyds Banking Group PLC And TSB Banking Group PLC’s Results appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.