B&B windfall goes south

The Bradford & Bingley bowler hat brigade faces a turkey without the trimmings

Chief executive Christopher Rodrigues sees nothing strange about the idea of turning Bradford & Bingley into an independent financial adviser which will sell its competitors' products alongside its own. Under his radical plan, by the end of the year consumers will be able to walk into any Bradford & Bingley branch in the country and get a Halifax mortgage, an Abbey National insurance policy or even a loan from the Bank of Kuwait.

Chief executive Christopher Rodrigues sees nothing strange about the idea of turning Bradford & Bingley into an independent financial adviser which will sell its competitors' products alongside its own. Under his radical plan, by the end of the year consumers will be able to walk into any Bradford & Bingley branch in the country and get a Halifax mortgage, an Abbey National insurance policy or even a loan from the Bank of Kuwait.

"The customer is an absolute winner with this strategy," he said. "It is a very strange system at the moment for the consumer, who has to run up and down the high street trying to work out which of 20 tied outlets to go to. There has been absolutely no resistance from the consumer to the idea. They say, 'gosh, I don't have to shop anywhere else'."

Unfortunately for Bradford & Bingley's 2.7 million members, however, many of whom were eagerly anticipating a bumper Christmas windfall from the society's imminent stock market flotation, City institutional investors do not share Mr Rodrigues' enthusiasm.

Qualifying investors and borrowers had hoped their 250 share allocation would produce a windfall payout of more than £800 when the building society converts to plc status and floats on the Stock Exchange on 4 December. Coming just before Christmas, analysts predict that many of them plan to sell their shares immediately and spend the cash on a bumper Yuletide.

However, despite presentations to the City all last week by the building society's adviser Goldman Sachs, institutional investors are understood to be preparing to shun the stock because they are deeply sceptical about the merits of Mr Rodrigues' diversification strategy. Analysts predict the flotation share price will have to be sharply discounted for a successful float.

Rivals Abbey National and Halifax are all trading at cheap valuations, but banking analysts say that Bradford & Bingley could be forced to price its shares with a rating of up to 20 per cent below even the current dog of the banking sector, Alliance and Leicester, in order to persuade investors to part with their cash. That would value the former building society at just £1.4bn compared to Goldman Sachs' earlier estimates of between £1.7bn and £2.2bn, slashing the value of members' share entitlements from more than £800 to just £500.

One City banking analyst said: "Most institutional investors I have spoken to are sceptical about Bradford & Bingley because no one has ever really tried its strategy before. There is a strong risk that institutional investors will only be persuaded to buy into Bradford & Bingley if it is 20 per cent cheaper than Alliance and Leicester, the nearest benchmark in the sector. You are not just buying a mortgage bank, you are buying a company which is changing its model. Institutions will be bidding very low."

One fund manager said: "Why on earth would anyone want to buy Bradford & Bingley? Their strategy is baloney."

It is the first time that a financial institution in the UK has attempted to become an independent mortgage broker selling rival products while still continuing to market its own mortgages, and analysts fear that trying to do both at the same time will confuse consumers and undermine the credibility of its stance as an independent adviser.

One City source said: "Bradford & Bingley is a confused society. Its strategy is completely unclear and it is struggling to find a position in the market with which to attract consumers. The market simply doesn't understand what they are doing. Halifax has got a brand, Abbey National has got some diversification, but what the hell has Bradford & Bingley got? It has got an idea that it wants to turn itself into a mortgage broker, but if it continues to sell its own mortgages as well as other people's, it will be confusing and will undermine the business. Even if you were being kind and said that their future strategy has got some kind of logic to it, it is still untried and unproven."

Mr Rodrigues, however, rejects the idea that there will be any conflict of interest between the two sides of the business, saying: "Most of the major retailers have own-label products as well as other people's products. Tesco has done it for years, Sainsbury's does it. Our broking sales people are completely disinterested in which products they sell; their goal is simply to complete a sale. There are no targets for our manufactured products and there are no special incentives. Our research shows that consumers are pleasantly surprised, but not confused."

Earlier this year Bradford & Bingley acquired independent mortgage broker John Charcol for £100m as part of its planned transformation into an independent financial adviser.

Mr Rodrigues said that Bradford & Bingley would launch a publicity campaign in the spring to promote its independent broking business to consumers, and that all 600 of its former building society and estate agency branches would be rebranded as The MarketPlace of Bradford & Bingley.

He insisted that Bradford & Bingley mortgage products would only be offered to consumers if their panel of financial advisers thought them worth recommending.

"I have no desire to spend my life being vilified because we had a broking panel which wasn't independent," he said. "People would lambast us from one end of the country to the other. It would be absolute insanity to buy the largest mortgage broker in Britain and shoot your foot off. We are not stupid."

In the first half of the year profits from selling rival products accounted for just £16m out of total profits of £167m, but Mr Rodrigues said that he hoped the broking business would account for half of Bradford & Bingley's business within five years.

Qualifying Bradford & Bingley investors and borrowers will receive confirmation within the next few days of their entitlement to the shares under the proposed conversion. They must decide by 24 November whether to keep or sell their shares on flotation. Simon Willis, banking analyst at ING Barings Charterhouse Securities, said: "Previously, people were looking at a valuation at the higher end of the mortgage bank sub-group, but now people are talking about it having to be discounted to the lowest end of the mortgage bank sub-group to get it away.

"The market is by no means yet convinced that Bradford & Bingley's diversification strategy is going to be sufficiently strong to enable it to achieve growth in overall earnings over the next two to three years. The market doesn't particularly like mortgage banks anyway."

Hugh Pye, banking analyst at Chase, pointed out that Bradford & Bingley is at a further disadvantage to the other former building societies in attracting potential institutional demand because it is not big enough for the FT-SE 100.

"Bradford & Bingley is trying to reposition itself as a more interesting animal for the stock market, but mortgage banks are pretty unloved," he said. "There is a lot more competition and Bradford & Bingley's basic business is undergoing a price war. The stock market doesn't like that."