BoS virtues rewarded with 30% profit surge

BANK OF SCOTLAND yesterday shrugged off the controversy over its recent tie-up with American evangelist Pat Robertson to deliver pre-tax profits of just over pounds 1bn for the year to the end of February, a rise of 30 per cent on the year before.

Peter Burt, group chief executive, yesterday dismissed the adverse reaction in Scotland to the deal to set up a direct banking operation in the US with Mr Robertson as a "little local difficulty".

Gavin Masterton, treasurer and managing director, insisted : "The Bank is areligious and apolitical." He added: "We are very enthused about opening up the American market."

Yesterday's headline profit figure includes a pounds 162.1m net gain on the sale of Countrywide Banking Corporation, the bank's New Zealand operation, to Lloyds TSB last year. When that is stripped out, together with the pounds 10m profit contribution of Countrywide before it was sold, underlying profit growth was a more modest 16 per cent.

The figures were in line with City forecasts, but expectations for this highly regarded bank are now so high that the results were greeted with mild disappointment. The bank's shares fell by 40p to close at 870p yesterday.

John Tyce at SG Securities said: "When excellence is expected of you, being OK is not good enough."

The bank enjoys an enviable reputation as a tightly run and highly innovative organisation. Its pioneering supermarket joint venture with Sainsbury's, the food retailer, is still losing money but it should move into profits in the first half of this year.

The bank is now exploring links on the Pat Robertson model with other organisations, both in the UK and abroad. Bank West, its Australian offshoot, has turned the corner and is now contributing to the steady profits growth.

Above all, Bank of Scotland has kept a tight grip on costs. The cost/income ratio fell again last year from 50.7 per cent to 49.1 per cent as growth in earnings continued to outpace growth in overheads.

Unlike its larger rivals, including the Royal Bank of Scotland, the bank is not mesmerised by acquisitions, although Mr Masterton insists that it does look at opportunities from time to time.

With a low and falling cost base, and unencumbered by an unwieldy English branch network, the bank is steadily increasing its market share at the expense of its bigger England-based rivals. UK market share is now up to 6.6 per cent.

Having put a brake on volume growth midway through the year because of concern about the impact of a slowdown in the economy, the group is now in expansionist mode again.

Mr Masterton said: "We constantly keep our cost income down. Logically we should gain market share. If the creativity in our products is there and our delivery is there, we have no need to worry."

SG Securities believes that, assuming no gains on disposals, headline profits will come in at pounds 1bn for 1999/2000, a shade down on this year, giving a prospective price/earnings ratio of 17, a discount to Lloyds TSB but a premium to Barclays.

There is little doubt Bank of Scotland deserves to trade on a higher rating than any UK bank apart from Lloyds TSB. For the moment, however, the price is up with events.