THE City greeted the TSB results with something akin to ecstasy and is
convinced that what was a disaster prone institution is now a sensibly
and tightly run bank.
Spurred by a hefty reduction in bad debt provisions, pre-tax profits
in the year to October shot ahead from #5m to #301m and should be able
to surpass the #420m achieved in 1988 when previous management began
using the #1500m flotation proceeds like water.
But the real excitement was the 20% increase in the dividend total --
7.68p with a 4.53p final. Effectively this was a catch-up on the
standstill years of 1991 and 1992.
The shares pushed ahead 15p to 267p for a market capitalisation of
#4040m or a half billion above that of the Royal Bank of Scotland --
arguably its closest competitor in terms of the geographic spread of the
branch network and dependence upon insurance.
The bank has taken what advantage it can of the criticisms currently
being directed at Barclays and National Westminster which are cutting
6400 jobs. About 110 small TSB branches will be closed this year but
there should be no specific TSB redundancies.
Chief executive Peter Ellwood indicated that there will be further
cutbacks but was not prepared to disclose their extent.
But in the drive to reduce the ratio of costs to income even further
-- still 57% in High Street banking and insurance services activities --
TSB is gambling that the closures will not lose too much income if
customers vote with their feet and take their custom elsewhere.
Staff numbers dropped 1700 last year and total redundancy costs
amounted to #70m.
The improvement in bad debts for the whole of the UK banking sector
had been foreshadowed last month by the Royal.
TSB's full-year total provisions and write-offs slid from #597m to
#343m and with the latest half year down to #138m. In the retail banking
business, there was an improvement from #82m to #50m, a most encouraging
pointer to a return to something approaching normality in the banking
sector.
However, the retail banking side's operating profits were under some
pressure, dropping #31m to #260m albeit with about #25m of the damage
occurring in the first half. The squeezing of deposit margins will
continue for some time yet -- the price of persuading customers to
switch from low to high yielding accounts to retain their loyalty -- so
the emphasis is on building up the mortgage book which rose 25% to
#5900m.
A telephone banking system should be up and running by the autumn.
Overall, insurance increased its contribution by half to #194m thanks
to the bank's above-average ability to sell products to customers,
helped by a decline in the claims ratio from 56% to 45%. This was a
result of a mild 1993 winter and #10m of realised investment portfolio
gains.
Happily, the Mortgage Express intermediary-introduced mortgage
business is now showing a small profit compared with a #67m deficit. The
business will move to the sidelines as it is further run down.
TSB has written to all 55,000 pension customers affected by scheme
transfers. It is holding its cards close to its chest as to the extent
of possible provisions but it is still continuing to sell policies.
The obvious concern is that of saturation in both the mortgage and
insurance markets as the traditional, rather dozy general insurers
getting their act together with the new telephone-based entrants such as
Direct Line.
But so far, TSB has outperformed in gaining young people's cheque
accounts.
Mr Ellwood finally put to rest any speculation that Hill Samuel will
be sold particularly after quite encouraging results from the merchant
bank where profits edged ahead #2m to #58m. This reflected the impact of
businesses sold during the year and the withdrawal from branch banking
with 11 office closures.
About 500 staff left and the cost savings will accrue in the current
year. Income will likely increase on the corporate and treasury
activities in particular.
The Loan Administration Unit, which took on the dud Hill Samuel loans
and which are chiefly in commercial property, saw its losses decline
#237m to #142m. But it will be a long battle to reduce the problem to
negligible proportions because the property letting market is still
comparatively slow.
So where does the TSB go from here?
It has a strong capital base with core-tier one capital of 8.7% and
little immmediate prospect of increasing its non-mortgage lending book
given the slow improvement in the domestic economy.
Chairman Sir Nicholas Goodison indicated that the surplus capital will
not be repaid to shareholders through dividends and instead pointed to
the need of the insurance activities for additional funds for expansion.
There is also the prospect of its making an acquisition with one
logical move being that of a building society, possibly in southern
England to counter the bias towards Scotland and and the North of
England.
Whatever the expansion, shareholders can be assured that after the
lessons of the Target, Mortgage Express and Hill Samuel acquisitions
which more than wiped out the flotation monies, any purchase will be
top-notch quality.
The shares having almost doubled in the last year are selling at
around 14 times likely 1994 earnings and yielding an historic 3.6% which
could rise to 4.2%.
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