'Tesco Bank' will grow slowly

by Ed Bowsher on 29 July 2009  |  7 comments
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Tesco's personal finance business may not grow as fast as some people think.

I've said before that reduced competition in the banking sector will a big issue for the next few years. Fewer banks probably means fewer attractive financial products for the consumer.

One answer to the problem is to break up some of the big banks such as Lloyds Banking Group. Another approach is to encourage new players to enter the UK market. At the weekend we learned that Bank of China has now moved into the UK mortgage market, and we also know that Tesco wants to build a much bigger personal finance business in the UK.

However, Tesco may face a bigger challenge than many people realise. According to a report on Citywire, Tesco may be forced to raise money from the wholesale finance market. That's because it hasn't attracted enough money from ordinary savers.

Citywire quotes an analyst at Morgan Stanley, Geoff Ruddell, who says that if Tesco gained a 5% market share in the UK consumer lending market, it would need to fund a loan book of around £70 billion. However, UK savers have deposited less than £5bn with Tesco even though the business has been operating for 10 years.

Of course, it was Northern Rock's reliance on the wholesale market that brought that bank down, so Tesco may be reluctant to follow the same model. Regulators may not be keen either.

So unless Tesco can dramatically increase the amount of savings money coming in from ordinary savers, it may struggle to become a big player in the loans and mortgage markets.

That's good news for the likes of Royal Bank of Scotland, but bad news for the likes of you and me.