Abbey able to reward faithful

INVESTMENT COLUMN

Abbey National has had plenty of doubters in the City following its recent agreed bids for National & Provincial Building Society and First National Finance Corporation (FNFC). Many felt that Abbey was overbidding, especially for FNFC's consumer credit business, which analysts argued made the previously rock-solid Abbey a more risky institution.

Put together with the continuing gloom in the UK housing sector, yesterday's interims might have been expected to test the persuasive skills of Lord Tugendhat, Abbey's chairman, and his chief executive, Peter Birch. Far from it. The rise in pre-tax profits of 14 per cent, and the 27 per cent hike in the interim dividend, were warmly received.

Even more so was Mr Birch's assurance that, after the two latest purchases, Abbey's key Tier 1 capital ratio, the recognised measure of assets against loans, would still stand at 8 per cent - double the regulatory minimum.

Abbey's shares rose another 3.5p to 521.5p yesterday, after a good run in the last week, as the market focused on Abbey's success in raising life assurance profits by 11 per cent against a dismal industry background. It seemed less concerned by Abbey's admission that the housing market would remain in the doldrums for another two to three years.

Its share of gross mortgage lending in the first half of 1995 was down to 9.7 per cent from 11.1 per cent in the second half of 1994, which had the effect of reducing net lending from 9.5 per cent to 4.4 per cent, but new mortgage applications recovered towards the end of the period.

Overheads rose from pounds 377m to pounds 412m, but do not look like growing at the same rate. Indeed, Abbey should succeed in hitting its target for a 40 per cent cost to income ratio by 1997. It stands at 44 per cent now, against a high street banking average of around 60 per cent, and should end the year lower than in 1994.

The market puts Abbey on a 1995 p/e of 10, against an average of 9.7 for the sector, making it good value on earnings grounds. The bank gave a dividend forecast in all but name yesterday, and the annual payout should rise by 22.5 per cent to 21.75p. On that basis, a yield of 5.2 per cent compared to a sector average of 4.7 per cent is also attractive.

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