TSB courting the yes vote

Despite the bank group's recent share weakness, the overall trend is forward. But can this continue?

THE BANK that likes to say yes is not being asked to do so often enough. That is the belief underpinning the recent weakness of TSB Group shares, which have come back to 250p from a year's peak of 268p.

Fresh light will be shed on the high street bank's prospects when it reports half-year results on Thursday. But as our chart shows, the latest setback is all of a piece with the two-steps-forward-one-step-back pattern that has taken the shares from their 1994 low of 199p. This suggests that the bulls are winning the tug- of-war with the bears as bets are placed that TSB will emerge from the current torrid loans market in a strong position to cash in on its relationship with its 7 million customers.

Last month we highlighted the views of the respected chartist Richard Marshall, of Investment Research. He sees solid support in the way that the 200-day moving average of the TSB share price is shadowing the daily price. "Resistance at the 150p level has been penetrated," said Marshall, signalling the start of a new advance. "I anticipate a rally developing to the 275p area."

Weighing in against Marshall has come Chris Smith of the stockbrokers James Capel, who gave TSB shares a fright a couple of weeks ago when he let it be known that in his opinion, "the volume of business is so low that they are having to employ excess capital in the capital market, where margins are lower".

Peter Ellwood, the group's chief executive, does not disagree that times are tough. But he believes TSB has the weaponry to trade its way on to a higher plane.

"Competition is massively fierce and will get fiercer," said Ellwood, who concedes his critics' main point that this must inevitably eat into profit margins. After the huge success Richard Branson's Virgin Group has had with its first foray into financial services, Ellwood predicts a host of other non-bank competitors moving in, with special offers and enough noise to distract the public from TSB and the other traditional high-street banks.

Ellwood, who has been a banker all his life but sprang to prominence when he ran the Barclaycard credit card operation, has a stronger marketing bias than most of his contemporaries and realises the need to hug the customer. "The whole thrust of our strategy," he explained, "is to provide better value for money. If you don't give customers that, you can't expect to keep them."

Not all such initiatives need hit the bottom line. Last year TSB became the latest to offer 24-hour, 365-day telephone banking in the wake of the success of Midland's First Direct operation. It is much cheaper to provide than the traditional street branch.

So far, TSB has been able to update its customer offer and improve returns, thanks to better staff training and greater efficiencies. In the five years to last October, income grew 40 per cent and pretax profit rose by 110 per cent. Last year's record pounds 500m profit gave shareholders a net return of 17 per cent.

That indicates that the group has a defensive cushion, some of which it can commit to the fray. Some has undoubtedly been siphoned into the group's life assurance operation since the rules changed in January to force disclosure of sales commission.

"We will see more and more of that kind of openness," Ellwood predicted, "and we will see thinner spreads. Nobody can hide, and we are all in favour of it. But it would be a brave person who said that margins would go up in the next five years - so volume has to go up."

Ellwood does not deny the possibility of expanding TSB's reach through buying a building society. He said: "We are closely in touch with the building society movement. An acquisition is always a possibility at the right price, but we have enormous potential to grow our business organically."

While the once-troubled Hill Samuel merchant banking subsidiary is back on an even keel, it is hard to see where volume increases are going to come from in the next year or two. Ellwood accepts that the housing market is not suddenly going to take off, and that the pensions and insurance markets are subdued.

A bright spot is small business, where TSB is strong because of long- standing connections with solicitors, schools and charities. TSB's greater emphasis on the personal banking market also gives it better prospects than rivals tied to increasingly cut-throat corporate lending.

Meanwhile, TSB shares have the defensive attraction of a useful 5 per cent dividend yield. According to the chairman, Sir Nicholas Goodison, this is set to continue. He has promised: "It is our policy to provide shareholders with a dividend increase above the rate of inflation, provided that trading experience and prospects justify it."

Activities Banking, insurance, investment services.

Share price 250p Prospective yield 5% Prospective price-earnings ratio 10 Dividend cover 2.5 1992/3 1993/4 1994/5* Income pounds 2bn pounds 1.9bn pounds 2.1bn Pre-tax profit pounds 301m pounds 504m pounds 575m Net profit pounds 184m pounds 312m pounds 356m Earnings per share 12.7p 21.5p 25p Dividend per share 7.68p 9.024p 10p (*forecast)