Bad-debt figures limit damage at Kleinwort

AN UNUSUALLY large drop in the level of bad debt provisions limited the fall in half-year profits at Kleinwort Benson, the UK's second-largest merchant bank.

Pre-tax profits slipped from pounds 24.7m to pounds 21.3m and earnings per share by 12.7p to 10.8p. The dividend, which some analysts had feared would be cut, is unchanged at 5.3p. Shares rose 2p to 242p.

The fall was ascribed to poor markets, particularly in corporate finance, treasury and UK equities. But the group made a pounds 5.3m provision for the cost of offices which it has vacated. Jonathan Agnew, chief executive, said Kleinwort had been unable to rent the offices at a price that would cover the costs.

Analysts were surprised by the low bad debt figures. Specific provisions for bad debts fell from pounds 29m to pounds 15m, and after recoveries of provisions made in past years the net figures dropped from pounds 19m to pounds 2m. The fall comes after large-scale provisions for bad debts over the past two years that left Kleinwort with provisions of more than pounds 100m for a loan book of pounds 760m. The high costs of the loan book led Kleinwort to cut its lending operations so that it only lends money when it is related to other business being given to Kleinwort.

Mr Agnew said the fall was due to higher-than-expected recoveries. 'Certain highly leveraged borrowers have been restructured and some have been taken over.'

Indications from the bank were that this low level of provisions would not be sustained. Phillip Gibbs, merchant banking analyst at Barclays de Zoete Wedd, said he thought Kleinwort's bad debt provisions would rise in the second half of the year and settle down to around pounds 10m next year.

Profits from the merchant banking side, which includes the securities operations, fell from pounds 23.4m to pounds 18m. The main reason for the fall was a drop in activity in the treasury side, which performed exceptionally well last year, but corporate finance business was also thin on the ground.

The securities side had a mixed performance. Equities suffered from low volumes but debt trading, which concentrates on sterling debt, had its best performance since the UK markets were deregulated in 1986.

Profits in investment management fell from pounds 13.4m to pounds 10.6m, partly due to higher provisions in the private banking operation. However there was a large amount of redemptions in Kleinwort's unit trust business and funds under management rose only slightly to around pounds 10bn.