Tesco (LSE:TSCO) (OTC:TSCDY) and Sainsbury (LSE:SBRY) (OTC: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.

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