TESCO has had a challenging 2012 to date. We saw the rebasing of group earnings in January; an unwelcome slowdown in trading at loss-making Fresh & Easy in the US; decelerating trading conditions in Central Europe; and impacts from restrictions on large store opening hours in South Korea – its most significant market outside the UK.
Among these challenges – many of which are outside Tesco’s control – it is pleasing to be able to record progress at Tesco Bank, following the formal announcement of its entrance into the UK mortgage market.
Tesco Bank has delivered some frustrations for shareholders over the last year or so, particularly in the slower than anticipated migration from the Royal Bank of Scotland platform. However, Philip Clarke (group chief executive) and Benny Higgins (Tesco Bank’s chief executive) have been correct to make sure that its standalone platform works. And the launch of mortgages suggests this migration has been effective. The competitiveness of Tesco Bank’s mortgage proposition will be measured in time, but its approach to mortgages will likely follow the broader context that has served the business very well in many markets over recent decades.
Shore Capital anticipates a patient approach to mortgages that seeks to be accessible by telephone and online banking. Tesco Bank doesn’t seem to be any further on in deciding whether or not to develop a branch network within Tesco’s extensive UK estate; we sense that it is more unlikely than likely – especially without a current account capability.
Tesco Bank will likely offer simple, relatively easy to understand products. As such, Tesco’s mortgages are unlikely to be at the racy end of the value league tables in terms of rates charged and collateral required. However, the Bank’s offerings should be reasonably priced. Underwhelming comments from some personal finance commentators on its initial product offering shouldn’t concern the Bank. Mortgages are a marathon, not a sprint product, and experienced Tesco banking heads are not in a dash for market share.
Tesco Bank has been conservatively funded and will remain so in the future. At present, the Bank is fully funded by deposits and while we expect modest access to wholesale markets, conservatism will remain the order of the day. Such a stance is likely to limit the pace and magnitude of growth of the lending book (including mortgages). Risk management is also expected to be tightly managed, drawing upon all of its customer experience and information, including the Dunnhumby managed Clubcard database.
Tesco believes, sensibly to our minds, that it shouldn’t assume any significant shifts in its market share in banking due to the public mood. But it is well placed to benefit from the antipathy, nay hostility, to mainstream banks in the UK. Tesco Bank, Metro Bank and Virgin Money should see the financial scandals as a favourable context for entering the market.
From marketing and customer attraction perspectives, Clubcard is a central feature that should help the Bank’s effectiveness on a relatively low-cost basis. “Rewarding loyalty” are watchwords used by Tesco Bank and Clubcard features in the mortgage proposition, with one point being offered for each £4 of mortgage repayments. The gentle expression of appreciation, positioning Clubcard as a “thank you”, rather than a “come on”, has merit from a marketing perspective. Indeed, Clubcard is at the heart of much of what Tesco is doing in the UK at present.
Simplicity, accessibility, convenience and attractive pricing – with a little thank you attached – are mantras that should lead to the building of a high quality book in time; just as Tesco has achieved a credit card market in the UK, where its plastic is used in around 12 per cent of UK transactions. However, it will take time. Current accounts remain some way off, as Tesco Bank awaits clarity on the government’s plans on account transfers, which are far from straightforward and easy at present.
Tesco Bank is a business that has the scope to deliver incremental but important growth; earnings that become all the more important with a mature core chain and leading positions already established in many other international markets. Every little helps.
Darren Shirley is food retailing and FMCG analyst at Shore Capital.