View from City Road: Making a necessity of a virtue

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The main gripe City folk have about Lloyds Bank is that it has made too much money during the recession, is sitting on a huge pile of capital and must do a deal now that recovery is here. These critics argue that if you strip out the contribution from problem-country debt, then operating profits for 1993 were practically flat.

Lloyds continues to be good at cutting costs but not at growing income. It faces a dilemma: whether to find a new way to make money - through buying other businesses - or give the money back to shareholders.

But this argument is upside down. It makes a necessity out of a virtue. Barclays and NatWest can only look on wistfully as Lloyds pays out a 20 per cent dividend increase. Lloyds is under no great pressure to do anything other than carry on making money.

The decision to hang on to its problem-country debt in the late 1980s has given Lloyds a convenient cushion for profits. The time to make an acquisition has already passed. There is no obvious victim like Midland, and Lloyds' share price has fallen behind the rest of the financial market, making acquisitions more expensive.

Better surely to hang on until the next cycle, when new bargains will arise. The main task Lloyds faces in the meantime is to keep its restless domestic deposit base happy. Brian Pitman does not expect any great threats to low interest rates, in which case savers will continue to desert bank deposit accounts for equity investments.

So anything that would expand the bank's range of investment services to customers would be welcome. But there are not many cheap, high-quality fund management companies for sale at the moment. Buying a building society would be attractive, but de-mutualising is a tricky business.

If, as seems likely, Lloyds does not make a significant acquisition in the near term, and Mr Pitman passes on to his successor in 1995 a bank roughly in the same shape as it is today, then it will be sitting on a mountain of capital, as will other banks such as TSB and Abbey National. They will be able to compete ferociously with weaker banks, which is good news for customers.