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Bottom Line: Scots make paper clips count

BANK OF SCOTLAND counts the paper clips, the printing bills and the forms in its branches with an eagle eye. A dozen styles of paying-in slips have been reduced to two, while multi-layered clerical documents costing pounds 3.50 each have been replaced with paper-work costing 17p. The bank is particularly proud of a new high-speed printing machine that saves pounds 17,000 a month on the cost of statements.

This mind-set, saving thousands so the millions can look after themselves, is largely responsible for the single most striking figure in its results: the ratio of the costs of running the bank to the income it made, the best benchmark for comparing efficiency.

Dull the number may be, but it is as important to Bank of Scotland's share price as the glamorous Direct Line insurance investment is to Royal Bank of Scotland.

Bank of Scotland's cost/income ratio fell from 54.7 per cent in the first half to 48.8 per cent in the second, the first mainstream bank to approach the level of that star of the sector, Abbey National, which is still a quasi-building society.

Bank of Scotland has hopes of getting the ratio a lot nearer to the building societies, of which the most efficient is Cheltenham & Gloucester, at about 30 per cent.

Even the present Bank of Scotland level shames the bigger clearing banks, which typically have ratios well over 60 per cent. Royal has made a brave start on improving efficiency, with the ratio coming down over the past year from 66.2 per cent to 61.8 per cent, but it has a long way to go to catch its Edinburgh rival.

One important reason for Bank of Scotland's falling costs is that it has built its English business without a large branch network. This has drawbacks, since it seems the nearer customers are to a bank manager the less likely they are to default. Bad debt provisions are worryingly high in proportion to the bank's size, and went up in the most recent six months, while Royal's went down. But they are not as bad as once feared, which explains the recent recovery in the share price.

Apart from the fact that their year-ends are five months apart, the two Scottish banks are increasingly hard to compare as their business styles diverge. With bid possibilities as well as Direct Line to boast about, Royal is on a more demanding earnings ratio, despite its belated attack on costs. But with the shares at 137p, down 1p, Bank of Scotland is a safer bet for the long haul. There is a lot to be said for people who switch out the lights when they go home.