Bottom Line: Society would lend TSB strength

IF ONLY TSB could buy a top ten building society today, everything would be all right. A society would give TSB the lending volumes it needs.

On that the City and TSB itself are agreed. Although the bank has roughly halved provisions against bad debts to pounds 113m in the latest half year, investors are worried about falling retail margins, lack of cost-cutting and falling operating profits in the bank's core 'bancassurance' activities.

Peter Ellwood, TSB's determined chief executive, replies that the bank's primary objective is to grow income.

While cost-cutting will continue the bank has more than enough capital to build new areas of business, such as the telephone banking service to be launched later this year.

TSB is now in an interesting position as an investment. During the depths of the recession it became a recovery play and, as the new management got to grips with Hill Samuel's bad debt mountain and concentrated on reviving the core business, the stock enjoyed a good run as bad debts fell.

Now TSB is grappling with the problems of a growth strategy. The shares hit a high of 289p in January 1994 from a low of 122p at the end of 1992, but have come off to under 220p since.

They are now on a prospective p/e of about 10 for the end of the year, compared with about 9.7 for Abbey National, 9.5 for Lloyds bank and 8.5 to 9.5 for the rest of the high street banks. So TSB is slightly more expensive than the rest.

Its prospective yield is about 5 per cent, again compared with 5.5 per cent for Lloyds and a bit less than that for Abbey National. Both of these should outstrip TSB's probable dividend growth of 12.5 per cent per annum.

As an investment TSB may yet succeed in its growth ambitions in the future.

If it can find an amenable building society it will definitely become a buy. But for the moment it looks expensive.