THE INVESTMENT COLUMN : TSB has to cut its capital

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The Independent Online
Combine a sluggish housing market with hostile publicity for personal investment products and it is not difficult to see why TSB's core bancassurance business is in the doldrums.

The 6 per cent fall in TSB's operating profit compared with analysts' worst forecasts of a 7 per cent decline and the most optimistic expectations of a 1 per cent rise, so while expected the decline was still at the disappointing end of the range.

There is no doubt that TSB is way over-capitalised. Its key Tier 1 capital ratio, a measure of balance sheet strength, stands at 9.8 per cent, compared with 6 or 7 per cent for most of the UK high street banks. This cramps the bank's return on equity, now around 17 per cent.

If capital were reduced in some way to the industry average, the return would bounce up to a more respectable 19 per cent. How might TSB do this?

The most tantalising suggestion has been that TSB would buy a building society. However, Sir Nicholas Goodison has been chatting to the available societies for so long without actually tabling a bid that his protestations that he "doesn't want to overpay", reiterated yesterday, sound increasingly hollow.

There are still over half a dozen societies that could complement TSB's existing mortage business, which had a sound year in tough conditions, and an acquisition might still happen.

The two other ways of cutting the capital are a share buy-back or a bumper dividend payment. There was no suggestion of either yesterday, with the interim payment raised from 3.5p to 4.1p.

Apart from a big fall in unit trust sales, the other worrying note sounded by yesterday's interims was the 3 per cent fall in income. TSB controlled costs well but not enough to prevent the cost/income ratio edging up from 58.4 per cent to 59.2 per cent.

On the basis of earnings, which could rise to 23.4p this year on the basis of pounds 550m of pre-tax profits, the shares look fully priced on a forward multiple of 11.