Tesco Personal Finance Plc. / Tesco Bank (LON: TSCO) today confirmed the sale of its mortgage portfolio to Lloyds Banking Group (LON: LLOY) for a cash consideration of c. £3.8bn. Tesco Bank has over 23,000 mortgage customers.
The mortgage portfolio has a lending balance of c. £3.7bn and generated directly attributable pre-tax profits of £9.1m in the 2018/19 financial year (after allocation of central overheads and other related costs the business made an immaterial contribution to Tesco Bank’s overall profitability). As part of the sale the entire residential mortgage portfolio and arrangements for the ongoing administration will transfer to Halifax, a division of Bank of Scotland plc, a wholly owned subsidiary of Lloyds Banking Group. The customer accounts will transfer to Halifax once necessary transitional arrangements have been delivered. It is anticipated that beneficial ownership will transfer at the end of September 2019 with legal title occurring by the end of March 2020.
The sale is in line with Tesco Bank’s strategy of focusing on a reduced number of products and services that serve the broad range of Tesco customers, and will reduce operating and funding costs. The sale proceeds will be used for re-investment into our customer offer, ongoing transformation of the business and re-balancing of retail and wholesale funding sources given the reduction in overall lending.
Commenting on the sale, Gerry Mallon, Tesco Bank Chief Executive, said:
“In May we announced our decision to stop new mortgage lending while we explored our options to sell the mortgage book.
“Our focus is on how we best serve Tesco customers and align our resources effectively to their needs while ensuring that our offer remains sustainable in the long term. As a result, we made the decision to move away from our mortgage offering. Our priority throughout has been to complete a commercially acceptable transaction with a purchaser who will continue to serve our customers well.
“After a thorough process, we are pleased to confirm that we have agreed the sale of our mortgage book to Lloyds Banking Group, operating under the Halifax brand. We are confident that they will continue to provide our customers with an excellent customer experience.”
As part of the transaction, Lloyds Banking Group said:
“We welcome over 23,000 mortgage customers who will be transitioning from Tesco Bank. Halifax has a proven track record in serving and supporting mortgage borrowers across the UK.
The transaction is consistent with Group strategy and value accretive to shareholders.
As previously indicated, the Group’s strong free capital build gives us flexibility to consider inorganic growth opportunities in selected target areas where we see value for shareholders. The transaction is in line with this approach and demonstrates the Group’s strong commitment to the strategically core prime mortgage market.
The acquired portfolio will generate good returns to the Group in excess of current organic market opportunities, while delivering open mortgage book growth within the Group’s low risk strategy and providing additional flexibility in participation choices in the mortgage market. Following this transaction, we now expect the Group’s open mortgage book assets at the year end to be ahead of the year end 2018 balance.
The purchase price of c. £3.8 billion represents a 2.5 per cent premium on gross book value. 2 It will be funded using existing internal resources with minimal impact on capital (mid to high single digits basis points at year end 2019). Under the ownership of Tesco Bank the portfolio generated customer income of c. £81 million and a pre-tax profit of c. £9 million in the year to 28 February 2019.
The beneficial ownership of the portfolio is expected to transfer at the end of September 2019, with transfer of legal title anticipated by the end of March 2020. We will work closely together with Tesco Bank to ensure a smooth transition to the Group for all customers.”
1 Halifax is a division of Bank of Scotland plc which is a wholly owned subsidiary of Lloyds Banking Group plc
2 There will be an adjustment at legal close for in-flight customer loans and further advances made to existing customers during the period until legal title transfer which is likely to be less than £30 million