Will investors say yes to ‘the bank that likes to say yes’ when TSB floats?

Will investors say “yes” to TSB, the bank that is returning to the stock market after an absence of almost 20 years?

Still best known for its catchy 1980s advertising campaign – “the bank that likes to say yes” – TSB has been part of Lloyds since 1995. Now Lloyds Banking Group has confirmed that the former Trustee Savings Bank, which can trace its roots back to 1810, is to be spun off next month.

With 4.5 million customers and a 4.2 per cent share of the UK current-account market, TSB is already Britain's seventh-largest bank. It has 631 branches – and if that figure sounds familiar, it's because it is the number of branches the European Commission demanded Lloyds sell off after the £20 billion (€25 billion) taxpayer bailout that followed its merger with HBOS at the height of the financial crisis. The sale is intended to boost banking competition on the high street.

And therein lies one of TSB’s main problems: this is the first stage of an enforced sale, which must be completed in full by the end of 2015. The timing, then, is not entirely under Lloyds’ control – and this is the same tranche of branches that the Co-op Bank so disastrously attempted to buy before it almost went belly-up last year.

Lloyds plans to sell 25 per cent of TSB’s shares next month, of which about a fifth have been earmarked for retail investors.

In an effort to increase TSB’s appeal to small shareholders in the initial public offering, those who buy in the float and hold on to their shares for at least a year will be rewarded with one free share for every 20 bought, up to £2,000.

Differentiating itself Ahead of the float, TSB has been busy differentiating itself from other "bad" banks, stressing its community roots and eschewing the casino-style investment banking speculation that dragged the global economy to the brink of colla- pse. "Welcome back to local banking" is its modern-day slogan, backed by a multimillion-pound marketing campaign. The bank has also been indemnified from the past sins of its parent, so there will be no legacy scandals to deal with.

One minus point for potential investors is the bank’s admission that it will not be in a position to pay dividends until 2017 as it pours profits into growth. TSB has been winning customers in recent weeks, largely because of its market- beating current account offer- ing interest of 5 per cent. But investors in banks traditionally buy for the yield and a three-year wait for a payout may prove too long for prospective shareholders, despite the promise of free shares.

By far the biggest worry for the bank, however, is the state of the IPO market. As the lacklustre debut of over-50s insurance and cruises group Saga showed last week, “flotation fatigue” appears to have set in after an unprecedented flurry of IPOs in recent months, many of which have been wildly overpriced.

Saga shares were finally priced at 185p – 25 per cent below the original pricing range. They ended their first day of dealing at exactly 185p, a big disappointment to investors, who traditionally expect a premium of 10 to 20 per cent.

A number of companies that have already floated have seen their shares drop below their flotation prices.

Adding to the uncertainty is the growing number of floats that have been pulled. Last week fashion chain Fat Face, owned by private-equity firm Bridgepoint, shelved its plans to join the market, blaming current conditions.

Plans abandoned The latest company to abandon float plans is the Hut Group, an online health and beauty retailer whose investors include former Tesco boss Sir Terry Leahy and ex-Marks & Spencer boss Sir Stuart Rose.

The business had at one stage been considering a £350 million float but said on Monday it had decided to resist the rush to market because of the “incredibly frothy” valuations. Instead, it has returned £13 million to its investors.

Until recently, banking analysts had been estimating a valuation of about £1.5 billion for TSB, a figure close to its book value. But that will depend on the market’s appetite for IPOs over the next few weeks, when TSB shares will be priced.

Investors should obviously wait for pricing details before making a decision on whether to buy. But flotation fatigue could well work in their favour, as the necessity for Lloyds to get the issue away could result in a tempting investment opportunity.

Fiona Walsh is business editor of theguardian.com