Dour Scot wakes up investors

THE last 300 years have been rather unexciting for the Bank of Scotland - until last Wednesday. True, it almost went bust in 1696, but since then it has toddled along uneventfully, avoiding most of the deeper pitfalls that have beset larger rivals south of the border. The bank's 31,000 small shareholders have been able to tuck the shares away, confident that the cautious Edinburgh-based management would not do anything reckless.

But with last week's decision to spend pounds 437m on BankWest, a state-owned bank on the other side of the world, BoS deserves fresh scrutiny. This is undeniably a more adventurous move than investors have come to expect.

For some years, BoS has been seeking an overseas string to its bow. It looked seriously at the US, but was put off by the prices: "Our Presbyterian instincts made us back off from paying top dollar," says Sir Bruce Pattullo, the BoS governor and the chief executive. Its forays into Continental Europe have been mixed. Hence the decision to alight on Australasia and, eventually Sir Bruce hopes, other parts of Asia-Pacific.

BoS already has trade, finance and consumer credit operations in Australia and a bank in New Zealand, the Countrywide. BankWest is a much more serious move. It dominates banking in Western Australia, responsible for 25 per cent of all loans advanced there. Sir Bruce sees the parochial relationship between Perth and the more populous eastern states as analagous to Edinbugh's relationship with London. "That little bit of chemistry is important," he says.

But the immediate response of Australians has not been positive: the common reaction in Perth was that their bank had been hijacked by foreigners. That hostility will doubtless soften, especially as the plan is to float 49 per cent of BankWest shares locally next year. History is not an encouraging augury. When Australia deregulated its banking system in the mid-1980s, most big British banks piled in, thinking they would clean up. Instead, in their aggressive quest for business, they signed up all the corporate borrowers that the better-informed locals had rejected. It was an unmitigated disaster.

BoS is unlikely to face the same problems. It is not building a loan book from scratch but buying an established bank. Doubtless there will be a few skeletons in the loan cupboard. Still, at least it does not seem to be paying too much: the price equates to a modest 1.8 times book value and just 10 times earnings. BoS expects the acquisition to be earnings neutral in year one and enhancing after.

The deal will almost certainly deter BoS from another mooted diversification plan - to buy a UK building society - a move Sir Bruce now describes as "too damned fashionable". Even without any more acquisitions, its balance sheet is more stretched than its peers. Back home, the group is in good health, expected to report pre-tax profits of pounds 262m for the half year next month. It wisely tries to corner specialist markets rather than fight all-comers in what Sir Bruce calls "commodity banking". Its most fruitful niches have been management buyouts and the oil and gas industry. It has also been ahead of the pack in electronic banking.

MBOs are particularly profitable. BoS not only earns a margin on the loans that finance them. It also takes hefty advisory fees. Moreover, the kinds of small, fast-growing businesses taking the MBO route are likely to be tomorrow's lucrative customers. BoS is not infallible even here: it has the dubious distinction of burning its fingers on two of the biggest MBO disasters - Isosceles and Magnet.

Overall, the bank is a tight ship. Its cost/income ratio, the analyst's favourite yardstick,, compares favourably with all but Abbey National. On the income side, it has ploughed rather a lonely furrow for five years. While rivals have pulled in their horns, BoS has been winning customers and gaining market share. Sir Bruce insists this spurt will not turn sour with a rash of non-performing debt. "It's not been a dash for growth," he says. BoS is at least conservative about provisioning - setting aside a sum each year for future sour loans.

Stockbroker SBC Warburg forecasts full-year profits of pounds 530m this year, giving earnings per share of 26.5p. The shares, at 239p, are therefore on a multiple of nine times prospective earnings, high by historical standards, though reasonable compared with the rest of the sector.

By wading into Australia, BoS has undeniably adopted a riskier strategy. That may concern shareholders who rely on a consistent dividend stream. But if Sir Bruce and his colleagues can absorb BankWest and use it as a springboard for growth, the long-term rewards could be brighter. By lucky coincidence, the deal was announced in the week when the World Bank ranked Australia as the richest nation on earth.