Lloyds TSB tops the tree

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The Independent Online
LLOYDS TSB Group has lost as much as one-quarter of its value in the past two months, yet analysts have lost none of their enthusiasm for the bank, considered the best in Britain.

If anything, they claim, Lloyds TSB may be in better shape than six months ago because its mortgage business is recovering and the fall in other banks' shares raises the likelihood of an acquisition.

Shares of Lloyds TSB, Britain's largest bank in terms of market value, fell 25 per cent from 1,075p in April to 805p last week, while the FT- SE Bank Index has dropped by about 10 per cent. While all the bank shares are in retreat, the pain has been spread unevenly across the sector. HSBC Holdings has fallen 23 per cent. By contrast, Barclays shares have fallen 6 per cent. Given Lloyds TSB has limited exposure to Asia, it seems to have been hit disproportionately hard.

Analysts say the problem lay in over-enthusiastic buying early in the year, and Lloyds TSB remains the cream of Britain's banking crop. "It'll continue to be the best performing bank in the UK," said Tim Clarke, an analyst at Nikko Securities.

Lloyds TSB was created in 1995 when Lloyds Bank bought TSB Group and the mortgage lender Cheltenham & Gloucester. The bank wants another acquisition, probably in mortgages or insurance. The combination has allowed it to increase market share and cut costs, so that last year it reported a 40 per cent return on equity and 41 per cent rise in net income, and shares rose 83 per cent.

However, the price dropped because it was looking too expensive in April at 24 times estimated 1998 earnings. Analysts also said the shares had risen so strongly that institutions wishing to switch out of financial shares were willing to sell Lloyds TSB at a strong profit.

The bank's outlook remains strong in its three main businesses - banking, mortgages and insurance.

Chief executive Peter Ellwood said new mortgage lending is recovering from the second half of last year as the bank abandoned a policy of undercutting competitors and interrupted business by training staff to sell C&G mortgages.

The life insurance business is benefiting from the increasing number of people saving for their own retirement, but analysts expect a one-time charge of about pounds 300m to sort out the pensions mis-selling problem.

The big question for Lloyds TSB is whether Brian Pitman, the group's chief executive, can buy a company that meets his criteria - an agreed acquisition in retail financial businesses cheap enough to benefit Lloyds TSB's shareholders. "Even if they can't do a deal, you're left with a bank that is producing mountains of cash," said Williams de Broe analyst Michael Trippitt. "It could crank up growth without jeopardising margins." He thinks the the shares will "outperform significantly".

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