Bank of Scotland looks into building societies: High efficiency helps profits to more than double

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BANK OF SCOTLAND confirmed yesterday that it had considered buying a building society, as it reported profits revealing that it ran its business more efficiently last year than seven of the top 20 societies.

Profits more than doubled to pounds 269m, and the bank said its ratio of costs to income was 48.6 per cent, beating for the first time its own target of 50 per cent. Most banks are well over 60 per cent.

At a time when banks are keen to take over building societies to benefit from their high efficiency, the bank beat Woolwich and a number of other top societies on the ratio of costs to income, though it was still well above the 26.4 per cent of Cheltenham & Gloucester, Lloyds' takeover target.

Peter Burt, chief general manager, said: 'Like everyone else we have looked at building societies and we remain ambivalent, which is a polite way of saying we can't make up our minds as to whether it is a good idea or a bad idea. We have had every merchant bank in the world saying would you like to buy a society, but they don't have any that necessarily want to be bought.'

One worry about buying a society, he said, was that their mortgage margins were high at times of low base rates but if interest rates rose they would not be such a good buy.

Bank of Scotland's bad debts fell steadily last year, with provisions for known losses down to pounds 284m from pounds 362m because of the economic recovery.

The bank is upbeat about the pace of economic recovery and predicted an acceleration in the bad debt improvement this year, adding that some of its pounds 1.226bn of non-performing loans were already beginning to pay interest again.

The bank also made clear it expects to make significant recoveries from bad loans during the recession, including some where it stepped in and took over problem properties such as golf courses and hotels and restored them to profit.

An unfinished golf course on Loch Lomond was bought from the receivers, completed and sold, so the bank got its money back instead of the pounds 2.5m loss that would have emerged if the project had been abandoned. Another problem property now restored to profit is the Balmoral Hotel in Edinburgh, which has been leased to Forte.

The bank raised its dividend 10.5 per cent. Because it was one of the few banks to expand its assets, by 7.1 per cent, its tier 1 ratio of equity capital to assets rose only slightly.