Fool's Eye View

[ September 27, 2000 ]

Bank of Scotland Interims

By Rob Davies (TMFEssex)

Carburton Street, London -- The Bank of Scotland (LSE: BSCT) wrote off £172m in bad and doubtful debts in the first half of the year. That is £19m more than in the same period last year and £6m more than in the second half on 1999. To me that is rather worrying. If bad debts are rising while the economy is booming what on earth is going to happen when the economy slows down? And there is a good chance that is exactly what is going on. Today we've had a profit warning from Securicor (LSE: SCR) to add to the one from New Look (LSE: NEW) yesterday, both blaming the fuel crisis.

But these big companies can probably look after themselves. It is the small traders that are probably going to suffer most after missing out on a week or 10 days of revenue. Some failures here will undoubtedly cause a knock-on effect and lead to rising bad debts. Although it did not comment on the fuel crisis effect the bank did say it had made a specific provision to cover falling used car values arising from structural changes in the UK car market.

It kicks off its interim results press release by saying that pre-tax profit rose by 14% to £535m. But that was before exceptional items. Ah, so let's see what they are. It turns out that the bank incurred £66m of exceptional costs relating to a major reorganisation of the bank's management and the front-end cost of outsourcing IT to IBM. In my book that makes them normal business expenses. So I added that exceptional charge back in to pre-tax profits, making them only £469m, £2m less than it made last year. We see a similar effect at the bottom line. Earnings per share fell to 21.9p from 22.7p, but the company gives prominence to the 25.7p figure struck before exceptional items. Despite that legerdemain the bank thinks it reasonable to raise the dividend 15% to 5.3p. To my mind that dividend increase is not justified.

Perhaps what is most troublesome about these figures is that while lending to customers grew by 20% the net interest margin shrank to 2.47% from 2.85% so that the net interest figure only rose by 5% and there was no increase in profits at the bottom line. The phrase "profitless growth" seems relevant.

The analysis of profits by division shows just how important personal banking is.

Division   Net interest    Pre-tax 
            margin (%)    profit (£m)  

Personal       3.45          168
Business       3.51          138
Corporate      1.80          155

Let's just hope all those loans for shiny new cars get repaid.

The shares fell 6p to 604p in early trade, leaving them on a price to earnings ratio of 11, but a miserly dividend yield of 2.2%. I would want more than that to compensate for the lack of any growth in profits.

What Next?

For more comments on these results go the Bank of Scotland and banking sector discussion boards. And this Fool's Eye View expresses some early concerns about the fuel crisis.