Tesco’s bank is a blot on its landscape even as sales surge

Tesco created one of the most successful retailer owned banks when moving into financial services was all the rage in the sector. But that means it’s got one of the biggest headaches now the tide has turned against it.

Former CEO David Lewis left his successor Ken Murphy a slimmed down but greatly revived business that has come into its own during the pandemic, as the latest set of interim results make clear.

But the bank represents a notable piece of unfinished business and spoiled an otherwise solid set of numbers that were a bit better than the City had expected even though profits fell.  

Those results were partly driven by its impressive online business, which has been flying. It’s worth noting that Tesco, over the last week, took back its position as the UK’s most valuable retailer that was briefly snatched by Ocado, its much smaller rival.

The latter has tech to sell, unlike Tesco, which partly explains its fancy valuation. But it boasts just a small fraction of Tesco’s market share and there’s the feel of the natural order being restored now the king has recovered its crown.

The grocer incurred more than half a billion pounds in extra costs as a result of the virus, but the pain of that was partly offset by a sharp rise in food sales, partly by the business rate holiday the group has enjoyed courtesy of chancellor Rishi Sunak.  

Needless to say, the controversy that accompanied the decision to pay a dividend despite this taxpayer funded bung hasn’t moved Murphy. To the contrary.

Shareholders coffers are being fattened by a sharply increased payout and they can expect more of that to come.

Murphy nonetheless has some work to do to keep this tank of a business on its tracks, which takes us back to the bank.

Lewis got the group’s exit from its troubled international businesses rolling, but the bank may prove to be even more of a problem child.

Something of a case study in just how difficult it is to compete with the UK’s big, established players, even if you get one of them to help you set up, it’s losing money, dragging down both the group’s operating and pre tax profits.

Rising bad debts are largely responsible, and they look set to continue to weigh on the business as  the economic pain already delivered by the pandemic, and the economic pain that’s coming from Brexit, make it tough for customers to pay their loans back.

Tesco Bank contributed a total of £155m worth of red ink, knocking some of the gloss off an otherwise favourable set of results. The full year loss is expected to hit £200m.

The group was at pains to stress that the bank’s capital and liquidity ratios “remain strong”. So no crisis, just a tough time for us.

But those aren’t things this business really wants people to be focussing at a time when it has more positive stories to tell, such as they way its Aldi price match has been eating into the disrupter’s market share, the performance of the aforementioned online business, the fancy margins the convenience stores achieve, the general sense of positive momentum, the jobs it’s creating.

If Murphy can find a way to get them out of future results statements, he’ll go someway to proving that Tesco has found a worthy successor to Lewis.

He could then set his mind to finding new avenues of growth for a business that could use them. Doing that successfully might even see him eclipsing one of better retail CEOs Britain has seen.