Investment Column: Abbey can not rely on habit

LIFE, AS Abbey National's ads keep telling us, is complicated enough. Until recently Abbey was on its own as the only former building society to have turned itself from a supposedly cuddly organisation caring for its members into a thrusting PLC eager to please money-grabbing City folk.

There are now five converted building societies, all complaining about how competitive the mortgage and savings market has become, and all boasting about how many new products - insurance policies and pensions - they are selling to their existing customers. Abbey appears to have advantage over the more recent converts to PLC status; it was first, and first by a long way.

Abbey's rivals are still struggling to get to grips with being a PLC, and now they have additional headaches following new arrivals like Egg, Prudential's new banking arm, in the mortgage and savings market.

Meanwhile, Abbey is several steps ahead of the game. While Halifax boasted yesterday that 35 per cent of its profits came from businesses other than mortgage and savings, Abbey is up to 49 per cent. It aims to be at 65 per cent within the next five years.

More importantly, it has had the time to decide exactly what it wants to be and who its customers are.

Abbey is happy being the bank for the middle class, people who slump in front of the television after putting the kids to bed, rather than firing up the PC to surf the net for a one-off mortgage deal. Abbey says trust us. You may not get the very best price that minute, but you will not get ripped off.

Half-year profits - up 17 per cent at pounds 875m - show the bank holding on to margins, but at the expense of letting its share of the mortgage market go to hang.

Its chief executive, Ian Harley claims that the hot money he may lose to the likes of the Prudential's Egg is no worry; Abbey's customers are more loyal and it has a greater share of the pensions, Individual Savings Accounts (ISA), and insurance market.

The claim is unconvincing, however. It may find that customers, even middle class ones, are more picky than it believes. Loyalty cannot be relied as Abbey's markets become more competitive.

ABN Amro expects full-year pre-tax profits of pounds 1.6bn, putting Abbey's shares, at 1137p, on a forward price-earnings ratio of 14.5. Given what Abbey has to lose now, the shares are expensive.