Property debts swallow TSB profits

A WORSENING property slump left TSB's bad debts last year almost as high as the record levels in 1991, wiping out nearly all the banking group's pounds 648m operating profit.

TSB made a pre-tax profit of pounds 43m in the year to 31 October, compared with a pounds 47m loss in 1991. But bad debts in the second half of last year at pounds 432m were the worst the bank had experienced in a six- month period. Despite the carnage, the bank used reserves to maintain the year's dividend at 6.4p.

The news from TSB confirmed widespread fears that most of the clearing banks would show similarly disastrous levels of property- related bad debts when they reported in a couple of months' time. But TSB has emerged as the bank with the worst-quality commercial and residential property lending portfolio of all. Total bad debts were pounds 597m compared with pounds 654m in 1991.

The Mortgage Express home loans business also took a further turn for the worse with bad debts of pounds 76m, pounds 26m higher than the year before, as repossessions continued at a high level and house prices fell.

The bank's hopes of an improvement in its overall bad debts in the year to October, expressed at the time of its interim results last summer, had been dashed by what Sir Nicholas Goodison, chairman, said was a deepening loss of confidence in the property market.

He added: 'There has not been a worse market in commercial or residential property in living business memory. It is virtually impossible to assess the value of many buildings with any confidence. The assumptions used in earlier valuations are no longer tenable.'

The worst blackspot was the lending book of the merchant bank Hill Samuel, where provisions on property and other loans were pounds 333m compared with pounds 435m in 1991. The past two years' provisions cost TSB the same as the price it paid for Hill Samuel in 1987.

As the bank foreshadowed last summer, Hill Samuel's bad and doubtful loans have been hived off into a Loan Administration Unit to allow the Hill Samuel management to concentrate on developing the business. TSB denied this was to clean it up for a sale, but Sir Nicholas confirmed that TSB was prepared to sell any of its non- core businesses, including Hill Samuel, if anybody made an offer at the right price.

He said it was not TSB policy to sell businesses out of which it could create greater value for shareholders 'unless we receive an offer from a buyer that we believe is in the interests of TSB shareholders'.

Sir Nicholas added that there had been a number of approaches for Hill Samuel and other subsidiaries, but no offers.

Of the pounds 1.8bn of Hill Samuel's pounds 4.3bn loans taken over by the unit, pounds 883m has been assigned bad debt status, almost half the total. Suspended interest on the affected loans cost another pounds 324m.

Fears that there could be another large round of bad debt provisions on the Hill Samuel loans this year were reinforced when Sir Nicholas said many of the loans were to companies now in receivership and the loan book was 'generally of poor quality'. Of the 1,200 loans, only one was in the pounds 15m- pounds 20m range and the rest smaller.

Sir Nicholas said banks would continue to suffer bad debts in the current year, and Peter Ellwood, chief executive, warned of continuing pressure on deposit margins. However, Sir Nicholas detected 'grounds for cautious optimism' in the economy.

(Photograph and graph omitted)

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