View from City Road: TSB's core could still attract bid

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SIR Nicholas Goodison has shrunk TSB's loan book for the second year running, parcelled the bank up into good and bad businesses so we can see where the problems are, and signalled that Hill Samuel and other peripheral bits are for sale at the right price. This genuine effort to come clean about the bank's problems still does not answer the main question about the shares.

The only good reason for buying them at their current price is the hope that a predator may be lurking. But will the new transparency make it easier for bidders to calculate the value in the bank, or send them scuttling away in fright?

The latest results do have a solid, reassuring core in the newly christened 'Bancassurance' business (a new financial buzzword), where TSB has merged retail banking and insurance management to become a more integrated version of what Lloyds is aiming for at the other end of the clearers' success scale.

TSB's Bancassurance business made pounds 426m before tax, a pounds 30m increase, and although pounds 20m of this was a profit on gilts sales it was a creditable performance in a bad year during which banking margins were under pressure. Insurance produced 30 per cent of the Bancassurance profits.

This is an attractive business, representing TSB's attempt to return to its last, though it is hard to see a startling profits growth in current market conditions, or outperformance against other bank recovery stocks. Indeed, even on the assumption that TSB achieves its avowed objective of a 15 per cent net return on shareholders' funds in four years' time, the shares still do not look particularly cheap.

The dividend will be strongly supported by the bank's excellent capital strength, though not by current earnings. But rapid dividend growth is not on the cards. There will probably be offers for some of the smaller business such as Swan National, though even in its cleaned-up state with a pounds 54m profit Hill Samuel Bank may have to wait a while for an offer the TSB would accept. The group has valued every subsidiary, and will not sell without a decent premium to its own valuation.

It is hard to gauge how much more will be lost this year in the bad debt workout unit and Mortgage Express, so a predator for the whole group would be taking a big risk now. But the core retail banking and insurance business will remain an attractive proposition and a bid should not be ruled out in the medium term.