The Investment column: Bank of Scotland steady as a rock

The Bank of Scotland has proved rock-steady in its performance through the UK's boom, bust and subsequent recovery. The bank, probably Scotland's biggest, has eschewed the excursions into investment banking, insurance underwriting and US banking which have brought mixed results for rivals. Instead it has used its limited presence south of the border to cherry-pick the best business there, while making limited forays into Antipodean banking.

Last year proved another vintage one for the bank, although the picture is muddied by acquisitions and disposals. The 22 per cent jump in pre- tax profits to pounds 664m in the 12 months to February is more like 27 per cent when the effects of deals are stripped out, including the first full year of BankWest, the Western Australia bank acquired for pounds 437m in 1995.

BankWest was one of the few shadows to darken another strong set of figures. The disappointing earnings of A$95m (pounds 45.2m) last year, A$5m below the prospectus forecast, were blamed on "unprecedented" pressure in home loans, which has seen interest margins more than halve to 1.7 per cent. Peter Burt, chief executive, warned yesterday the bank had further to go. But effort is being put into cutting costs there, where the cost-income ratio is now 8 percentage points above the parent bank. There was also a note of caution surrounding Countrywide, the former New Zealand building society owned by BoS, where intense competition continues to hit margins.

But the group continues to power ahead in its home market, with little help from lower bad debt provisions, which fell just 1 per cent to pounds 175m. Profits of pounds 399m from the clearing bank represented an underlying rise of 29 per cent on the back of strong lending figures: mortgages were up 14 per cent, while credit cards showed a 17 per cent rise. With nearly two-thirds of its business coming from England, the bank remains in the market for a building society, but not at current prices.

Meanwhile, its lack of branches in England has put it at the forefront of "virtual" banking. The latest manifestation, the banking link-up with J Sainsbury, is storming ahead. It has signed up 100,000 customers after just eight weeks, when, as insiders at the bank gleefully point out, it took Direct Line, owned by arch-rivals the Royal Bank of Scotland, eight years and tens of millions of pounds in advertising to get 500,000 customers. The bank reckons the business, just one of 300 link-ups with outside organisations,could be profitable in 18 months.

The sharp deceleration in the fall in bad debt provisions and a drop in interest margins suggests the banking cycle is about to turn. But BoS should be well geared to any consumer boom around the corner, while its innate caution should allow it to weather any downturn that follows.

Profits are expected to rise to pounds 725m this year, putting the shares, down 0.5p at 3338.5p, on a forward multiple of 10. Attractive.