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Banking retreat pulls down share market

Abbey National led a ragged retreat by the previously high-flying banking sector yesterday after NatWest's profits warning on Monday pricked the speculative bubble that had buoyed the former building society's shares. NatWest is understood to have approached Abbey with merger proposals but analysts believe lower profits and the loss of the head of its investment banking division this week make a bid less likely.

The 37p fall in Abbey's shares to 831p means it has fallen from a high of 961p in only a few weeks. The fall was matched by a 20p slide in Lloyds TSB's shares to 606.5p and a further 9.5p fall from NatWest to 745.5p after Monday's collapse.

Tumbling bank shares were a major influence on the 63-point fall in the FTSE 100 index of leading shares, which financial stocks now dominate.

"Hopes for a bid from NatWest are down the pan," one dealer said. "We decided some time ago Abbey had got too high and the stock is boiling over. The whole sector has come a bit easier and it's probably no surprise that the more speculative stocks have been hit more than most."

Analysts continued to take their red pens to profit forecasts for NatWest yesterday following Monday's announcement that a slump in returns from NatWest Markets, its investment banking arm, would peg group profits back to pounds 770m in the six months to June. The inability of NatWest Markets to generate a decent return on capital claimed its first senior scalp this week when Martin Owen, its chief executive, was ousted.

Brokers were sceptical about the bank's near-term prospects, with Lehman Brothers' Robert Law suggesting even the most radical action might not transform the bank's outlook.

"NatWest looks set for a long haul," he said. "It is difficult to escape the conclusion that NatWest has no obviously sizeable businesses with attractive profitability, market share or competitive advantage."

He cut his 1997 profit forecast by 13 per cent to pounds 1.75bn and expects next year's profits to be only pounds 2bn compared to a previous estimate of pounds 2.3bn.

Pressure is mounting on Derek Wanless, NatWest's group chief executive, to give the market proof that investment banking can pay its way. One broker said: "They have to be clearer on strategy."

Speculation was growing yesterday that NatWest's derivatives trading operation would be an early victim of the company's focus on its profitable activities.