20th Feb 2023 17:41
(Alliance News) - Sky News reported on Saturday that Tesco PLC is set to review options for the future of Tesco Bank, which could include a sale of the business.
One of Sky's sources indicated that a joint venture or partial sale of Tesco Bank was on the cards. The unit is estimated to be worth over GBP1 billion, according to a banking analyst cited by Sky.
https://news.sky.com/story/supermarket-giant-tesco-to-explore-sale-of-banking-arm-12813796
Russ Mould, investment director at AJ Bell, said that Tesco offloading its banking arm makes "perfect sense".
"Supermarkets should concentrate on grocery and core essentials that fall under general merchandise, such as frying pans, greetings cards and a small line of toys to keep the kids happy while the parents shop," Mould said.
"The days of consumer-facing companies offering a broad range of services to their customer base are long gone. Banking is a heavily regulated business, and staff must keep on top of a lot of rules and complexity. The broader financial services space is highly competitive and requires significant investment in technology to improve systems."
"With that backdrop in mind, one should expect to see many companies like Tesco concentrate on what they do best and find someone else to take over activities on the periphery."
Mould explained that Tesco Bank remains a profitable entity, boasting more than 5 million customers and thus making it a "significant player in the market". This, he said, means the arm could be an "attractive acquisition" for another banking provider seeking to grow its market share.
In the first half of Tesco's current financial year, its banking arm brought in revenue of GBP540 million and adjusted operating profit of GBP67 million.
Mould suggested Lloyds Banking Group PLC and Virgin Money UK PLC might be interested in Tesco Bank, and so might NatWest Group PLC, which was previously the supermarket's joint venture partner.
Shore Capital were more pessimistic about Tesco's potential sale, however.
"If real, any such move would follow on from similar explorations by [J Sainsbury PLC], its domestic peer, with respect to its bank, which did not come to any realisation apart from retention," it said.
"We shall, of course, wait to see what transpires in time, noting that Tesco Bank has materially re-trenched from initial aspirations to be a challenger bank, a view that under-estimated the power of incumbency but also the massive regulatory, technological, and capital requirements to be a mass-market retail financial services provider."
Nonetheless, Shore Capital noted that any disposal could be another "notable notch" in the simplification of Tesco "from a global retail powerhouse, number two in the world at the turn of the century, to a grocer focused upon the British Isles."
Despite the potential for simplification, Shore Capital insisted that "whatever happens, Tesco does not need to dispose of its bank."
"With strong ongoing cash flow from operations, modest non-lease net debt, and sound pension funding, Tesco can explore portfolio development from a position of calm strength here on and, indeed, opportunism, as we saw with the recent purchase of the Paperchase brand."
Shares in Tesco closed marginally higher at 251.08 pence on Monday in London. Over the past 12-months, the stock is down 13%.
By Heather Rydings, Alliance News senior economics reporter
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