Between the lines of Pitman's shorthand

The Investment Column

Sir Brian Pitman's position at the top of British banking has only been enhanced by the first full year's performance of Lloyds TSB, the financial services behemoth he has created and now chairs. As well as being Britain's biggest domestic bank, the group is the UK's third- largest life insurance company and probably took a bigger share of the new mortgage market than any other lender last year.

But the headline numbers are impressive too. Since the December 1995 reverse takeover of Lloyds by TSB, profits have soared 52 per cent to pounds 2.51bn, producing a storming 48 per cent return on average shareholders' equity, close to double the previous year's figure. According to Sir Brian's new economic profit measure, which attempts to measure returns after deducting the risk-adjusted cost of equity, the bottom line has fattened 69 per cent to pounds 1.06bn in 1996.

It is little wonder the bank's shares have outperformed the rest of the stock market by a quarter since the merger, rising another 1.5p to 503.5p yesterday. The raw figures do, however, need more than a little interpretation.

First off, integration has muddied the waters. Stripping out the 1995 charge of pounds 425m for TSB and another pounds 75m charged last year for restructuring Lloyds Abbey Life, 100 per cent-owned since last December, would trim the profits growth back to 24 per cent. Within that, probably the biggest boost came from a full-year's contribution from Cheltenham & Gloucester, the former building society for which Lloyds paid pounds 1.7bn in 1995.

The addition of C&G, which raised its profits contribution from pounds 67m to pounds 336m, was a key factor in the increase from pounds 1.27bn to pounds 1.72bn in the core retail financial services operations. Most of the 23 per cent increase in average domestic lending to pounds 73.5bn came from C&G and mortgages now represent around 45 per cent of the group total.

That has had the happy effect of increasing the quality of Lloyds' loan portfolio. Arrears at C&G run at around half the industry average, so the addition of its mortgage book has helped dilute the effects of Lloyds' existing problem lending.

Thus bad debt provisions tumbled from pounds 583m to pounds 327m last year. Lloyds is boasting that for the first time, its total outstanding provisions of pounds 2.55bn are greater than the level of non-performing loans.

The underlying business of Lloyds is clearly of high quality and Sir Brian has made all the right strategic moves so far, eschewing investment banking and US adventures to focus almost solely on the UK market. He continues to search for another building society and possibly another insurance company.

But the cycle never dies and Lloyds' dependence on the UK could prove a handicap when it finally turns. That moment could be close: last year's bad debt charge of 0.4 per cent is a level not seen since 1988, just ahead of the last banking crash.

Meantime, profits this year of pounds 2.95bn would put the shares on a forward p/e of 14. Hold.

Bounce goes out of Grosvenor

While its peers in the managed pub sector have continued their recent relentless rise, shares in the Slug & Lettuce pub chain Grosvenor Inns have had a dreadful year, falling from a high of 285p to a recent low of 165.5p. After a good bounce towards the end of last month to about 220p, half year results yesterday put the boot in once again and the shares sagged 17.5p to 206p.

The fall yesterday came despite a 25 per cent jump in pre-tax profits to pounds 1.10m, struck from a 36 per cent rise in sales to pounds 11.8m. Earnings per share were 17 per cent better at 5.7p and a half year dividend of 3.025p, up 10 per cent, is to be paid.

Analysts took the company to task for its failure to translate a 43 per cent rise in sales at its core Slug & Lettuce chain into a similar rise in profits. A rise of just 27 per cent reflected continuing investment in the brand and the cost of beefing up its food offering. Two new sites in Windsor and Upper St Martin's Lane in London recovered from a slow start and are now beating their budgets but if Grosvenor is really to capitalise on the brand it needs to roll Slugs out faster than it can currently manage.

That means making quicker progress in releasing funds from the half of its business which is going nowhere - some wine bars such as Hodgsons on Chancery Lane and a handful of taverns, which are really nothing more than bog-standard old fashioned pubs. In the books at around pounds 12m in total, a sale of those assets would free up much-needed capital for the 20 Slug & Lettuce openings the company promises but arguably can't really afford just yet.

The other main worry to emerge from yesterday's figures was the early exit from the Bar Central concept whose failure was underlined by the discount to net assets represented by the pounds 2m it achieved on disposal. Grosvenor also had to pay Inntrepreneur half a million pounds to take five duff pubs off its hands. With all that baggage it is hardly surprising the market won't put the shares on a Wetherspoon or Regent Inns sort of rating.

On the basis of forecast profits of pounds 2.4m this year, the shares trade on about 16 times prospective earnings per share. That's a discount to the rest of its fashionable sector but deservedly so. Grosvenor is doing the right things, focusing on its core brand, but until it gets out of its funding bind the shares are high enough.

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