Bluechip: Halifax: to have and to hold

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The Independent Online
Tomorrow is a big day for savers with the Halifax, as they wait for shares in the new bank to start trading. The latest indications suggest they will begin at around 700p - way above initial estimates of up to 450p.

The question for savers is whether to sell now, and take a tidy profit, or tuck them away.

While savers will be delighted, it is more difficult for outsiders to decide if the shares offer any value at these levels as a long- term investment.

The Halifax is the largest mortgage lender in the country, but it chose to convert to bank status for several reasons. It allows the company to raise equity funding and frees it from the strait-jacket of building society legislation, which restricts access to the debt markets and means it cannot enter areas other than mortgage and personal loans.

Overall, the track record of societies which have converted has been impressive. The Abbey National, which floated in 1989 at 130p a share, now stands at 880.5p. It has successfully expanded overseas, while also diversifying into insurance. The TSB - not quite the same, but in similar terrain - made some disastrous moves. But even so, it came good eventually: pounds 1,000 invested in the shares in 1987 was worth pounds 7,100 by the end of 1996.

So on past performance it seems clear that financial stocks are a licence to print money.

To use another comparison, if the shares start trading at 700p, they will be on a price/earnings ratio of about 16 times the current year's earnings. That leaves it on a par with the sector's highest-rated stock, Lloyds TSB, which has shown a remarkable capacity to grow earnings.

Does the Halifax measure up on this front? Given its market share in mortgages, and proven ability to develop other products, it should certainly be granted the benefit of the doubt. It may be that Lloyds TSB, along with the entire banking sector, is overvalued at the moment. But the Halifax must be seen as one of the most effective players.

It also arrives with up to pounds 3bn in surplus capital, which it has hinted will be returned to shareholders. It gives it enormous flexibility to make a big acquisition, and Legal & General is among the names mentioned. While the Halifax lacks a track record in major diversification, its reputation for efficiency should stand it in good stead. The shares are a buy, for the long term.