William Kay: How to get the most out of the banks as they circle the Abbey

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The shape of the battle for Abbey National is not yet clear, and it may still be that Banco Santander will walk away with it unopposed with its current agreed £8.2bn offer. But that is looking increasingly unlikely, in which case there may well be profitable opportunities arising for investors.

HBOS, owner of Halifax and Bank of Scotland, said this week that it is having a preliminary look at making a counter-bid for Abbey. Other banks, including notably HSBC and Royal Bank of Scotland, are refusing to comment but are also refusing at present to rule themselves out of the contest.

There is no argument that Abbey is a valuable brand with a large customer base. The obstacle is that the Competition Commission, if asked to rule, may ban most of Britain's biggest banks from entering an auction for Abbey. The basis for this belief is that Lloyds TSB was prevented from doing so three years ago.

But HBOS thinks it might be allowed to buy Abbey, even though the combined group would account for a third of all mortgages in the UK. The likes of HSBC and RBS could argue that, though they would be even bigger with Abbey bolted on to them, they have a much smaller slice of the mortgage market than HBOS.

But there is also an element of chess tactics about the current manoeuvring. The bigger banks may want to provoke a competition inquiry into the whole industry, which might decide on a free-for-all. Unlikely, but stranger things have happened. It would also create time for potential bidders to formulate offers which might meet with the regulators' approval, such as selling off parts of their business. When Sir Fred Goodwin, RBS's chief executive, was presenting his group's half-year results this week he pointed out that its mortgage margins were shrinking while those from corporate lending were rising. But there is no doubt which offers the better margin: mortgages. The regulators may worry that taking out Abbey, the sixth-biggest bank, will allow mortgage margins to rise.

Aside from the Abbey situation, the banks' half-year results have generally presented a buoyant picture of healthy profits, and more to come from further increases in interest rates. Yet most of the banks' share prices are well below their 2004 highs, which suggests there may be scope for recovery. And in the meantime there may be fun to be had from the jockeying for position over Abbey.

How to benefit? My pick of the bank shares are Abbey, which should be pushed higher by the bid battle, and RBS, which has plenty of profit to squeeze out of recent acquisitions and would make the most of Abbey if it got it.

Do not forget other potential targets which may be snapped up if there turns out to be a wave of takeovers. Alliance & Leicester, Bradford & Bingley and Northern Rock could all feature.

If you are not brave enough to wade in and buy the shares directly, there are some well-run funds that do the job for you. I like Framlington Financial, a global fund which has RBS, HBOS, HSBC and Barclays as its four biggest holdings. Jupiter Financial Opportunities and New Star Financial Leaders offer a wider spread, both internationally and beyond the strict banking sector.

* City pages have had good sport poking fun at Prudential being left with egg on its face and other puns, but there is a serious question for Egg customers: how will they be affected by the Pru's failure to sell the internet bank and credit card business?

On the face of it, not at all. The 700,000 bank customers will be able to do business on screen as before. And Egg's 2.8m credit cards will still be accepted as payment. But a business with a reluctant parent, as Pru now is, tends to atrophy. Money for investment is hard to come by; initiatives are discouraged.

Jonathan Bloomer, Pru's chief executive, wants to pump more product through Egg, to fatten it up for possible future sale. But don't expect too many market-beating offers.

Be warned by Investec's action: turn off the teps

The traded endowment policy (tep) market was thrown into confusion this week when Investec, the South African financial group, withdrew two of the main players.

Investec said that, "having reviewed the future potential of the tep market", its Policy Portfolio and Beale Dobie offshoots no longer intend to purchase endowments. Investec was unwilling to explain the decision.

Teps are bought and sold either at auction or through a market-maker, and have been a useful check on the scandalously low surrender values which insurance companies have put on the policies they issued. They have been bought by investors who want a guaranteed return and the possibility of good bonuses. The buyer keeps paying the premiums as if they were the original policyholder.

While the Association of Policy Market-Makers insist that there is still demand for teps, their attraction is not what it was. There are no guarantees attached to teps, and you buy them on the open market at your own risk. But they have become much more of a gamble.

One of the remaining tep firms, Policy Plus, says that they have policies which guarantee more than 5 per cent, and bonus rates should rise again over the next 10 years. But it is not long since teps were offering a rock-solid 10 per cent or more.

I am wary of a market where leading participants suddenly withdraw. This may have been part of a worldwide review by Investec, but if teps were still a lucrative business they would surely have stayed in. So if your financial adviser nudges you towards teps, think twice.


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