Abbey plans joint venture with CU: Fear of falling margins hits shares, in spite of 41% leap in pre-tax profits

Click to follow
The Independent Online
ABBEY National, Britain's second-largest mortgage lender, reported a 41 per cent rise in half- year pre-tax profits to pounds 423m yesterday, and announced an ambitious joint venture with Commercial Union, the insurer.

The new venture will become Abbey's sole provider of house and contents insurance and should generate at least pounds 100m a year in profits within five years, according to Peter Birch, chief executive.

It will be launched in the middle of next year and is expected to generate gross written premiums of pounds 250m in its first year. The move anticipates a change in building society regulation in the autumn that will allow societies to own general insurers.

The new joint venture will have two divisions: CU will put in a total of pounds 75m and will own 85 per cent of the underwriting division and 25 per cent of the distribution arm. It hopes to profit from Abbey's 12 million-customer base. Abbey will invest pounds 25m and use the venture to expand into other areas of general insurance.

The stock market was more interested in Abbey's falling margins, and its shares dropped 12p to 385p. Abbey's results confirmed fears raised by Lloyds Bank last week that competition is forcing down margins on retail banking.

Abbey's key group net interest margin fell from 1.86 per cent last time to 1.6 per cent for the six months to June. Analysts had expected 1.74 per cent.

'I dispute that our margins are under enormous pressure,' Mr Birch said. Much of the fall was caused by expansion in treasury activities, which had lower margins than the mortgage business. Abbey's interim dividend rises 37 per cent to 5.7p, representing a rebalancing of interim and final payments. Mr Birch said the total dividend would probably grow about 22 per cent.

The derivatives joint venture with Barings merchant bank made a positive contribution to profits which, Mr Birch said, was no mean feat following the bond market turmoil this spring.

The 6 per cent rise in retail banking profits to pounds 314m reflected the slow growth in the mortgage market, according to Sir Christopher Tugendhat, chairman. The level of transactions in the housing market was on an upwards trend, but he was not looking for dramatic growth. There was no need for an interest-rate rise.

Mortgages six or more months in arrears fell 18 per cent and repossessions halved, leading to a fall in bad-debt provisions from pounds 159m to pounds 41m. Pre-tax earnings from life insurance more than doubled to pounds 47m and losses from Abbey's Continental operations, mainly France, fell from pounds 86m to pounds 17m.

(Photograph omitted)