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* IPO priced at 220-290 pence per share
* Mid-point give TSB market value of 1.3 billion pounds
* Range values business at 0.7-0.9 times book value
* Business made profit of 172 mln stg in 2013
* Could eventually pay dividend worth 40-60 pct of earnings (Adds further details from IPO prospectus)
By Matt Scuffham
LONDON, June 9 (Reuters) - Britain's Lloyds Banking Group has priced the stock market listing of its TSB businessat below book value, aiming to attract investors amid a flurryof new issues and make progress on a much-delayed, costly sale.
Lloyds, 25 percent-owned by the government, is obliged byEuropean competition regulators to sell the 631 branches whichnow form TSB as a condition for their approval of state aidreceived by the bank during the financial crisis five years ago.
Lloyds had to ask the European Commission to extend anoriginal deadline of November 2013 to the end of 2015 after aplanned sale to the Co-operative Bank collapsed, sparking aparliamentary inquiry, and the cost of the entire sale processhas risen to 1.6 billion pounds ($2.7 billion).
Banking industry sources expect Lloyds to sell TSB in threeor four tranches, just as part state-owned rival Royal Bank ofScotland did with the sale of its Direct Line insurance business, which was sold off in stages with eachtranche priced higher than the previous sale.
The initial price reflects a cooling of investor interest inUK company flotations in recent weeks after a rush of activityearlier in 2014. Clothing chain Fat Face pulled its plannedLondon listing last week while shares in insurance-to-holidaysfirm Saga have fallen below their issue price.
"I am feeling these IPOs (initial public offerings) arestarting to grow weary on investors. Bearing in mind Lloyds needto make the disposal as they are obliged, it may be just a caseof them making sure it is fully subscribed to," said EdWoolfitt, head of sales at stockbroker Galvan.
Lloyds said the shares would be sold at between 220 penceand 290 pence each, valuing TSB at between 0.7 and 0.9 times itsbook - or net asset - value of 1.6 billion pounds.
At the mid-point of the range the business is valued at 1.3billion pounds ($2.1 billion).
In comparison, Lloyds is currently trading at 1.3 times bookvalue, HSBC at 1.1 times, while Barclays andRoyal Bank of Scotland are trading at 0.7 times bookvalue, in part reflecting a legacy of past misconduct.
HEAD START
Oriel Securities analyst Vivek Raja said the valuationreflected weak profitability at TSB, which could be explained byits loan book predominantly comprising mortgages from theCheltenham & Gloucester building society, which Lloyds acquiredin 1995. Those mortgages are capped at 2 percent over the baserate compared with a market average of 3.9 percent.
In its IPO prospectus published on Monday, TSB said thebusiness made an underlying profit of 172 million pounds lastyear, compared with 28 million in 2012 and 57 million in 2011.
TSB has 4.5 million customers and 6 percent of bank branchesin the UK, making it Britain's seventh-largest retail bank andgiving it a head start over other so-called challenger banksaiming to take on the established industry heavyweights.
It is hoping to attract investors looking for exposure toBritain's economic recovery from a bank which is untainted byscandals that have dogged the industry since the financialcrisis. TSB has agreed an indemnity from Lloyds againsthistorical conduct-related losses, meaning it will not need topay out for past misconduct such as the mis-selling of loaninsurance, which has cost Lloyds 9.8 billion pounds.
"It's going to be a very clean balance sheet so if it comesat a discount to book one would think that's going to be veryattractive," said Jefferies analyst Joe Dickerson.
TSB's focus on growth means it does not anticipate paying adividend to shareholders until at least 2017. The bank plans toexpand its balance sheet by 40 to 50 percent over the next fiveyears and is targeting a return on equity of 10 percent or more.
The bank said in its prospectus it could eventually pay dividends worth between 40 percent and 60 percent of underlyingearnings and would consider acquisitions. It also committed to a"targeted programme of new branch openings" to increase theproportion of Britons living within 2 miles of a TSB branch.
Final pricing will be announced on June 20, with initialdealings starting on the same day.
($1 = 0.5956 British Pounds) (Additional reporting by Francesco Canepa; Editing by KateHolton, Mark Potter and Pravin Char)
