BoS casts a light amid the gloom

Bankers may be characterised as dour, cautious people but they do not go looking for bad omens if they can help it, which is probably just as well for the Bank of Scotland and its shareholders. Last week they voted overwhelmingly to approve the £29bn merger with Halifax, a "defining moment" in the bank’s long and successful history, as Sir John Shaw, the governor, suggested. It was also something of a defining moment in the global economy.

Seemingly relentless profits warnings were accompanied by global job losses totalling some 100,000 in businesses as diverse as American telecoms group Lucent, conglomerate ABB, technology manufacturer Hewlett Packard, investment bank Dresdner Kleinwort Wasserstein and media firm Reuters. Corporate life does not get much more desperate than this and to top it off the week ended with dismal output figures from both the UK and the United States that suggested the global slowdown is getting worse.

In conditions such as these it might be deemed to be tempting fate in rubber-stamping the creation of HBOS, although Shaw in heralding "a new chapter" in the bank’s history would no doubt add that the so-called "fifth force" in UK banking is far better equipped to withstand economic turmoil than the two constituent parts could on their own.

Indeed, BoS did not recoil from the inauspicious doom and gloom all around it last week but instead celebrated its extraordinary general meeting vote with what it does best: a corporate deal. As we report on page three, BoS emerged at the tail end of the week as the debt financier for Dalkeith-based Letts’ takeover of Filofax Group. Supporters would regard this as an example of exemplary time-management.

A 17m company takeover is not big in the scheme of things but it is a good example of where BoS has concentrated its energies of late and why it is arguably closer to the heart of British business than any other major bank. Over the past 18 months or so BoS has backed many more corporate deals than its rivals. In fact the bank supported Letts’ own management buyout 11 months ago.

With Letts and Filofax, BoS has provided the debt only. But in the recent past it has permed any combination of senior debt, mezzanine debt, equity and joint ventures that can be imagined. It has marched into established, old economy industries, where stock market investors have feared to tread or have simply failed to see value. Where even venture capitalists have gone into hibernation, BoS’s appetite for deals seems keener than ever. It has happily wandered into that notorious graveyard for banks, the property sector, with both corporate deals and direct investments.

Since the unveiling of the Halifax merger in May, Scotland on Sunday has revealed BoS has some 1bn of Letts/Filofax type deals in the pipeline. The figure is staggering but it can be doubled if new debt facilities for existing corporate customers are taken into account.

Last week, figures from the British Bankers’ Association showed that mortgage lending surged to a record 10.35bn in June. Inevitably Halifax, as Britain’s biggest mortgage lender, will have reaped some lucrative gains. But the figures mask the true story since they will undoubtedly include a large proportion of cut-price, remortgaging deals, which just cannot be sustained. The mortgage business is increasingly competitive, and margins are getting ever smaller.

It is reasonable to assume that business banking, not current accounts and mortgages, will be the main driving force for the growth in profits at HBOS.

So far UK banks have not felt the chill wind of recession in the same way as their corporate customers. Bad debts are nowhere near as bad as in the US banks and in this respect BoS has had one of the most respectable track records in the sector. Some commentators feel that something will have to give with the UK banks sooner or later.

And yet despite the economic turmoil which has crippled so much of industry, if anything the senior directors at BoS relish the idea of a bigger balance sheet to chase even more business. They believe they will have the financial strength to take a long term position and ride out the downturn. They deserve the benefit of the doubt but one thing is for sure, this "new chapter" will make fascinating reading.