Lloyds spends £4bn on Tesco Bank’s mortgages book

Lloyds Banking Group today splashed out £3.8 billion on Tesco Bank’s mortgage book in a big bet on the UK economy holding up in the face of Brexit.

Tesco’s 23,000 mortgage customers will be transferred to Halifax, which is owned by Bank of Scotland, itself a subsidiary of Lloyds, which beat RBS and Santander to the deal.

Lloyds is paying a 2.5% premium compared with the loans’ outstanding book value but said the deal would still produce better returns than issuing new loans.

The buy is a bold move for the Black Horse lender, seen as a bellwether for the UK economy, as Britain grapples with Brexit turmoil. Tesco hoiked a For Sale sign over the mortgage loans in May blaming “challenging market conditions”, which have driven down profit margins in banking.

Increased competition has been spurred by a combination of low interest rates and legislation requiring international banking groups to ringfence their UK banking operations, leading to investment in mortgage lending. For Tesco, the deal allows it to slim its banking arm, which has six million customers, to focus on products including current accounts, insurance and credit cards.

The retail behemoth has been cutting the empire of former chief Sir Terry Leahy, who launched the bank in 1997, to focus on its core UK grocery arm.

Lloyds holds around 20% of the mortgage market with the Tesco deal adding less than 1% but it believes the quality of the book made the deal worth it.

Lloyds director of retail Vim Maru said: “This is a good deal for the group, our shareholders and Tesco’s mortgage customers.”

Tesco Bank chief executive Gerry Mallon said it had completed a “commercially acceptable transaction with a purchaser who will continue to serve our customers well”.