Personal Finance: Brian Tora's column

BANKS ARE the institutions you love to hate. If they do well they have every chance of being hit with a windfall tax. If they do badly the pundit at the bar smiles over his pint and says it couldn't happen to a nicer company - and then complains about how much the chairman and chief executive are paid.

No-one can say we have not had a lot of excitement in the banking world recently. Superstar Martin Taylor has been ousted from Barclays Bank, which only goes to show that even journalists get it wrong sometimes. Virtual banks are cropping up all over the place, while building societies have fallen over themselves to join the ranks of banks. And now it's the bank reporting season, so we can chart the winners and losers.

Among the winners must be Lloyds TSB. Britain's second largest bank (HSBC can officially lay claim to the number one slot now that it officially resides in London) has demonstrated once again that it has costs under control, its margins neatly sewn up and it understands how to make money out of our money. Barclays on the other hand gave a rather sad account of itself at the analysts' meeting that followed the publication of the results this week. The new chief executive has only been in the job a few days, so perhaps the disappointment felt by those who attended the meeting owed more the fact that he did not emerge from a telephone kiosk, wearing his underpants over skin-tight trousers.

There are plenty who believe that Barclays needs the Superman touch after the last year with its ignominious exit from investment banking, its involvement in the Russian debacle and its lending to a hedge fund that succeeded in vapourising $4bn in less time than it takes me to write this article.

In theory now should not be the time to buy bank shares. Banks make more money when interest rates are high. Low rates mean low margins in theory, although banks have been remarkably adept at maintaining profit flow despite the less friendly environment that a low-inflation, low-interest-rate culture brings. You have only to look at the interest charges on credit cards.

Overall I find it hard to ignore a sector that accounts for the biggest slug of the FTSE100 index by industrial categorisation. Still the results season is showing that you do have to be careful in your selection. Not the least reason for having this unsympathetic sector in your portfolio must be the certainty that consolidation will continue and that in five years there will be far fewer banks and many less branches around.

Barclays must be high on the likely merger list. My office looks straight into their headquarters on the other side of Lombard Street, so I am constantly watching for signs of unusual corporate activity. Even so I would prefer to stick banks demonstrating proof of quality, so Lloyds TSB remains at the top of my list along with the Scottish banks - although it is interesting that Barclays seems to have shunned the overtures of the Royal Bank of Scotland. Perhaps the alternative, the Bank of Scotland, should feature on your buy list. They are, after all, led by a supermarket baron, so he at least should understand the threats within the changing face of UK banking.

Brian Tora is head of Greig Middleton Asset Management