Investment: Bank of Scotland has reason to be cheerful

BANK SHARES have been almost universally hard hit by the global financial chaos. But when the exposure of different banks to debt defaults and currency crises varies so widely, should they really be tarred with the same brush?

Bank of Scotland is a case in point. Its exposure to Russia, Asia and other precarious markets is negligible, and it has made no foolhardy investments in highly-leveraged hedge funds.

The bank also has a solid loan portfolio. Mortgages make up 29 per cent of group lending and only a tiny proportion of its loan portfolio - 1.8 per cent - is non-performing.

True, profits will not escape an economic downturn. In spite of reporting a 14 per cent rise in first-half profits to pounds 420.1m, the bank was careful yesterday to warn investors it faced a less benign environment.

Chief executive Peter Burt has already reigned in growth through a stricter lending policy. New business grew by only 9 per cent - compared to 17 per cent the previous year.

Bank of Scotland has a history of expanding organically and, with a 6.5 per cent share of the UK lending market, is still small enough for this to be feasible. Ventures such as the banking partnership with Sainsbury's or its new life office incur losses upfront but will yield healthy profits over five years. Where acquisitions haven't fitted that cautious strategy - such as Countrywide in New Zealand - they have been ditched.

Broker Morgan Stanley predicts earnings of pounds 850m for the full year to February 1999. At 561.5p - down 18p yesterday - the shares trade on a forward multiple of 13. That's a premium to Barclays, but there are also other reasons to be cheerful about Bank of Scotland. A long-term buy.