Supermarket firm Tesco (TSCO) has sold its UK mortgage business to Lloyds Bank (LLOY) for £3.8bn in cash, a slight premium to the £3.7bn value of the portfolio.
Halifax, wholly owned by Lloyds, will take on the whole residential mortgage book at the end of September and will administrate it going forward.
Shares in Tesco fell 0.7% to 222.62p while Lloyds dipped 1.5% to 49.56p, although the share price declines should also been viewed in the context of renewed weakness in sterling which is weighing on UK companies.
Tesco announced in May that it had stopped offering mortgages and that it would spend the summer looking for a suitable buyer.
For its 23,000 mortgage customers, Halifax - one of the biggest and best-known lenders in the UK - is likely to be seen as a ‘safe pair of hands’.
READ MORE ABOUT TESCO HERE and LLOYDS HERE
Tesco’s mortgage business generated interest income of £81m and pre-tax profit of £9.1m in the financial year to 28 February 2019.
However, after allocating central office overheads and other related costs, the contribution to Tesco Bank was ‘immaterial’.
Selling off the business allows Tesco Bank to reduce its operating and funding costs while the cash inflow will be reinvested in other banking products.
Meanwhile Lloyds says that ‘the acquired portfolio will generate good returns in excess of current organic market opportunities’ which is positive for shareholders.
Thanks to the purchase, which it is funding from its own cash pile, Lloyds’ open mortgage book will be larger this year than it was in 2018. Originally it had expected the mortgage book to shrink this year.
Competition among banks, building societies and challenger banks to lend money to house-buyers has resulted in some of the lowest fixed rates on mortgages for decades, which is great news for consumers but bad news for bank earnings.
