Citi hails positive impact of banking disposal at Tesco

Citi has renewed its rating on supermarket giant Tesco with a 'buy', hailing the positive impact of last week's £600m disposal of most of its retail banking business to Barclays.

The deal, announced on 9 February, will see Tesco sell its existing banking operations in credit cards, loans and savings, removing £7.7bn of capital-intensive assets and £6.7bn of liabilities from its balance sheet. Tesco said it expected to rake in a further £100m after the settlement of regulatory capital amounts and transaction costs.

Combined with the £250m special dividend paid by Tesco Bank last August, this is expected to result in a total of around £1bn, the majority of which will be returned to shareholders in the form of an incremental share buyback.

The companies also agreed a 10-year partnership to market and distribute credit cards, unsecured personal loans and deposits using the Tesco brand, as well as explore other opportunities to offer financial services to Tesco customers. Tesco will keep insurance, ATM, travel money and gift card operations.

"We view the transaction positively, retaining the ability to monetise Tesco's inherently low acquisition costs for financial services but without the complexity, infrastructure or capital intensity of a captive bank subsidiary," Citi said in a research note.

The bank said that the future shape of Tesco's financial services exposure "is not entirely dissimilar to Tesco's highly successful business before its 2008 buyout of Tesco Personal Finance".

Citi has set a 320p target price for the stock, suggesting around 15% upside from Tuesday morning's price of 279.2p, down 0.5% on the day.