TSB puts Hill Samuel back on the market

HILL SAMUEL, the troubled merchant banking arm of TSB Group, has been put back on the market five years after it was bought at the peak of the stock market boom.

The bank is understood to be on offer without the portfolio of bad corporate loans that pushed the TSB group as a whole into loss in 1991. These are being taken over by the parent bank, which will manage them as a separate work-out unit in the hope of recovering some of the write-downs made on the loans, once the economy picks up.

Hill Samuel is believed unsaleable with the bad loans included. But the idea of separating them out was first mooted earlier this year at TSB, partly to boost morale and remove the shadow of past disasters, at a time when the merchant bank was being reorganised.

TSB is also believed to be soliciting offers for Hill Samuel both with and without its investment management subsidiary, one of the biggest in Britain.

This is a prime attraction for any potential buyer, because it has pounds 24bn under management or advice. It would be snapped up at the right price during what could become a wave of consolidation in the investment management business. Hill Samuel also owns Bell Lawrie White, one of the largest private client stockbrokers with pounds 3bn of funds.

TSB appears to be keeping open the option of holding on to Hill Samuel Investment Management if it can find somebody willing to buy the rest of the merchant bank.

But it may have to sweeten the pill by selling both together because the recession has had such an effect on some key merchant banking areas such as corporate finance, where activity has almost ground to a halt.

Judging by the time it has taken Royal Bank of Scotland to find a buyer for its Charterhouse merchant banking subsidiary, TSB is unlikely to achieve a quick sale at a good price. Royal has been in talks for months with Credit Commercial de France.

In the year to October 1991, Hill Samuel lost pounds 419m after a pounds 432m provision against bad debts. This dragged TSB Group into a pounds 47m loss.

In the half-year to April 1992, the Hill Samuel loss was reduced to pounds 54m, but the underlying performance of the merchant bank remained 'awful', according to Smith New Court, the broker, which said it would be 'years before TSB earns a decent return on the capital invested in Hill Samuel'.

Hill Samuel was bought by TSB in 1987 when the merchant bank was on the rebound from a takeover by Union Bank of Switzerland. UBS withdrew at the last minute.

The price of pounds 770m was criticised at the time because the offer was made before the October 1987 crash but completed afterwards.

TSB declined to force a renegotiation of the terms despite the big drop in merchant bank share prices and was left holding an overpriced acquisition that soon went wrong.

Under the ownership of the strongly capitalised TSB Group, Hill Samuel raised its own lending rapidly, and also took over some of TSB's corporate business.

In the 18 months after the acquisition, the loan book expanded by pounds 3bn, or 66 per cent, well above banking averages, and standards for assessing new borrowers fell.

Much of the expansion took place at the peak of the late-1980s boom just as longer-established lenders were beginning to withdraw. Hill Samuel ended up with a large proportion of loans to companies in difficulty, of which Brent Walker was the best-known. Losses on the loans in 1990 and 1991 alone were three-quarters of the price TSB paid.

The Hill Samuel management team was purged 18 months ago by Sir Nicholas Goodison, TSB chairman, when Hamish Donaldson, chief executive, retired early.

TSB said it would not comment on market rumours.