The Investment Column: Sir Bruce gets the simple things right

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The Independent Online
Assuming no disasters between now and next June's annual meeting, Sir Bruce Pattullo will bow out on a high note after 18 years at the helm of Bank of Scotland. Yesterday's record pounds 369m interim profits were 14 per cent up on last year's first half and beat most expectations.

They confirmed the merits of combining the bank's 300-year-old conservatism with an impressive streak of innovation that meant it entered direct banking years ahead of rivals and pioneered supermarket banking with Sainsbury. Despite having no branch network in England, Bank of Scotland's market share of the UK banking sector has risen in a more or less straight line during Sir Bruce's tenure.

It has achieved that by doing simple things right. While many believe that any rise in costs is unacceptable, Sir Bruce says no company ever downsized itself to greatness. Key is growing income faster than costs and Bank of Scotland has been doing that for years.

As a result it has some of the most impressive statistics in the sector. The tier 1 ratio of capital to income, the most common measure of a bank's balance sheet strength, rose to a healthy 6.8 per cent from 6.3 per cent. And the important cost/ income ratio improved to 51.4 per cent from 52.9 per cent.

Some analysts question Bank of Scotland's strategy, particularly its move into Australia. Shareholders, however, should have no complaints. At the start of 1993, the shares traded at 110p. Yesterday they closed 2p lower at 510p.

Even after such a strong run the price looks justifiable on a forward p/e ratio of 14, although the 1.9 per cent yield leaves little margin of safety. As a relative minnow in a sector of leviathans, a takeover must be odds on. Good value.