Investment Column: Bid hopes buoy up Schroders

THREE themes have cropped up over and over during this year's banking season - the Asian crisis, lacklustre investment banking and consolidation prospects. And Schroders, one of the few remaining independent UK merchant banks, yesterday proved to be no exception to the rule.

Schroders announced a 3 per cent rise in pre tax profits to pounds 245m for the year to December. It posted Asian provisions to the tune of pounds 32m - more than expected. On the investment banking side, profits were slightly down on last year. And, as far as mergers go, the bank repeated its commitment to an independent future.

So if Schroders' results don't mark it out from the banking crowd, why is it running at a forward p/e of more than 20 - high even for pricey financial stocks?

Firstly, although the investment banking business is hardly going great guns, it has not - unlike some - been a disaster. Second, investment banking accounts for less than half of Schroders profits. The remainder comes from its burgeoning fund management business. This had a good year last year and looks set for more of the same.

Thirdly, the share price is buoyed up by consolidation hopes. Many sector watchers believe that, irrespective of Schroders' public position, it is only a matter of time before it succumbs. And finally, many of the shares are held by the Schroders' family and the bank's employees. So institutions are typically keen to get their hands on the stock - even at today's heady prices.

The shares closed down 3 per cent at 2332p, due to a mixture of profit taking and the Asian provisions. The consolidation hopes and the illiquidity of the stock means the bull run on Schroders' shares may not be at an end just yet, although those in for the longer term would do better to look elsewhere.