Despite the setback Abbey National's pre-tax profits for the six months to 30 June 1993 grew by 11 per cent from pounds 270m to pounds 301m, helped by a big fall in repossessions in the UK. Bad debts in the UK fell to pounds 118m from pounds 146m last time.
The French losses were not eligible for tax relief, so the bank's effective tax rate rose to 46 per cent. Earnings per share consequently fell to 12.5p compared with 13.2p last June.
Peter Birch, group chief executive, said that when Abbey acquired the French business in early 1990 it had a commercial property lending arm as well as a residential business.
Mr Birch admitted that the subsidiary 'shouldn't have extended its commercial lending,' and that such lending had stopped in March 1992. The commercial book was now being run down, and the French side would concentrate on residential lending. There had been some changes to its top management, he said, and branches had been halved to six.
But Sir Christopher Tugendhat, chairman, said Abbey still viewed the French operation as a long-term investment. 'It's difficult to make decisions in the eye of the storm, but overtime the French market is likely to perform impressively again.'
As far as the ERM 'storm' was concerned, Sir Christopher said that it was now far more likely that interest rates would fall. 'Obviously we are concerned in the decline of the savings market, but the great strength of our plc status is that we can raise funds on the wholesale markets.'
Any cut in interest rates would probably make fixed-rate mortgages cheaper, but variable-rate mortgages would be much less affected, he said.
Abbey National's share of total liquid savings in the UK fell from 7.9 per cent in second-half 1992 to 3.3 per cent in the first half of this year. Mr Birch insisted that individual investors were important to the bank. Abbey raised about pounds 1bn on the wholesale money markets this year, he said.
Sir Christopher said that Abbey's French problems would continue to be managed 'with vigour', and that negotiations were continuing over the sale of Cornerstone, Abbey's residential UK estate agency network. The bank would henceforward concentrate on its core businesses of UK retail, life assurance and treasury operations.
Mr Birch said that much of the 13 per cent increase in Abbey's operating expenses was due to the launch of Abbey National Life at the beginning of the year, but that this was more than matched by 15 per cent growth in operating income. The ratio of costs to income actually improved from 45.2 per cent to 44.4 per cent.
The new life subsidiary made 60,000 policy proposals in its first five months, Sir Christopher said, and together with Abbey's other life operation, Scottish Mutual, made pre-tax profits of pounds 18m in the first half.
The best part of the group's results came from the UK retail operations, reflecting the beginnings of recovery in the UK housing market, he said. Pre-tax profits rose nearly a third to pounds 300m while bad debts fell by nearly a fifth to pounds 118m.
The total repossessions fell to 7,801 from 9,331 at the end of 1992. Sir Christopher said: 'The fall reflects both a lower level of repossessions and a faster rate of disposals. Each of these is a reflection of continued low interest rates and improving levels of sales, if not prices, on the housing market.'
Repossessions represented 0.23 per cent of Abbey's total mortgage lending, compared to the Council of Mortgage Lenders' average of 0.32 per cent.
Abbey's treasury operations enjoyed a 74 per cent growth in profits to pounds 66m, and now had assets of pounds 27bn compared with pounds 74bn for the group. 'We think this balance is about right, and we expect profits from treasury to level off,' Mr Birch said.
The bank paid an interim dividend of 4.15p, up 9 per cent on last time's 3.80p. The shares rose 10p to 393p. Analysts were worried that Abbey's margins would be squeezed over the next 12 months, and that its expanded share of the UK mortgage market had been bought at too high a price.
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