Banking: The New Supermarket Battleground

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Tesco (LSE: TSCO  ) (NASDAQOTH: TSCDY  ) and Sainsbury (LSE: SBRY  ) (NASDAQOTH: JSAIY  ) are the two most innovative of the U.K.'s supermarkets. They've slugged it out over hypermarkets, convenience stores, non-grocery merchandise, and online sales.

The latest battle ground is banking. Sainsbury is buying out partner Lloyds Banking from their joint-venture Sainsbury's Bank. Tesco Bank is adding mortgages and current accounts after slowing development while it migrated to a new computer system.

Why are they doing it?

  • It's profitable. Sainsbury's Bank's profit grew at a compound rate of 40% per year over the past three years, and it sees big scope for future growth. Tesco took 100 million pounds in dividends from its bank last year.
  • There's a captive customer base. Banking services expand the range of products that can be sold to existing in-store and online customers. The supermarkets have better distribution networks than high-street banks.
  • Banking adds to customer stickiness. Sainsbury asserts that after taking out a banking product, shoppers become more loyal and spend more in-store. That's cemented by Sainsbury's Nectar card and Tesco's Clubcard.

Central to these benefits is the value of customer data and cross-selling opportunities. Retail banking can be more profitable for supermarkets than for high-street banks.

How do they compare?
Both banks offer savings, personal loans, credit cards, and insurance products (on a commission basis). Tesco started offering mortgages last August and plans to provide current accounts next year when an industrywide switching service is in place.


Sainsbury's Bank (100% basis)

Tesco Bank

Number of customers

1.5 million

2.8 million

Profit before tax

59 million pounds

124 million pounds

Tangible net assets

500 million pounds

800 million pounds

Tier 1 capital ratio



Customer loans to deposits



The number of banking customers is broadly in line with share of grocery sales, suggesting that they've achieved similar levels of customer penetration. Sainsbury's Bank is more highly leveraged, but Tesco Bank only just funds all its assets from retail deposits.

What could go wrong?
The travails of the Co-operative Bank are testimony to the potential risks. After a swingeing six-notch downgrade by Moody's, the parent retail group might be forced to sell assets to bail it out. But the Co-op overreached itself when it bought Britannia Building Society in 2009, and there's no indication either supermarket will engage in such a foray.

Tesco's mortgage business is a long-term commitment. Thirty-year mortgage assets will permanently tie it into garnering customer deposits, or else risk the vagaries of the wholesale funding market. Investors won't want to see the mortgage book get too big. And Tesco has discovered that things can go wrong: It set aside 115 million pounds for PPI and other mis-selling last year.

But you don't make money without taking risks, and generally supermarkets are some of the safest businesses on the stock market. That's why one has been chosen by The Motley Fool as one of "five shares to retire on." You can find out which one it is, as well as the identity of the other four companies, in this report. You can download it by clicking here -- it's free.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2430210, ~/Articles/ArticleHandler.aspx, 9/28/2016 7:57:59 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,339.24 110.94 0.61%
S&P 500 2,171.37 11.44 0.53%
NASD 5,318.55 12.84 0.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 12:12 PM
SBRY $248.70 Down -2.10 -0.84%
Sainsbury (J) CAPS Rating: No stars
TSCO $178.07 Up +0.32 +0.18%
Tesco CAPS Rating: No stars
JSAIY $12.72 Down -0.48 -3.60%
J Sainsbury plc (A… CAPS Rating: No stars
TSCDY $6.90 Down -0.03 -0.43%
Tesco CAPS Rating: *****