Expansion and marketing costs push Egg back into the red

The online bank Egg has taken a 5 per cent share of the UK credit card market and remains upbeat about its future, despite slipping back in to the red in the second quarter.

Paul Gratton, the chief executive of Egg, put the quarter's loss down to the £7.5m ploughed into international expansion and an increased marketing spend. Having completed the deal for the French online bank Zebank in May for £5.5m, Egg plans to launch in France by the end of the year.

He said the additional £5m spent on the brand and marketing, which included a television advertising campaign, in the second quarter has paid off. Egg succeeded in pulling in 205,000 new customers in the UK, putting its total at 2.3 million, above rivals such as HBOS's Intelligent Finance and Abbey National's Cahoot.

Egg – which is 79 per cent owned by Prudential – traded buoyantly in the UK and posted a pre-tax profit of £4.6m for the quarter. Over the six months to 30 June, Egg has turned out a £8.7m profit in the UK, compared with a loss of £61.7m last year.

Compared with the same time last year, Egg has narrowed its losses for the quarter. It beat forecasts by cutting group losses to £1.2m from £25.5m in 2001, but was still down from a £2.4m profit in the first quarter.

Mr Gratton remains confident growth will continue in to the next half of the year, particularly through credit card and savings business. Egg was one of the UK's first internet banks that used cheap personal loans and high savings rates to lure customers away from the traditional high street banks.

Credit card balances have now reached £2.1bn from 1.7 million card customers, up from the £1.5bn it had this time last year. Mr Gratton says he is happy with the credit quality of the business, which is attracting upmarket customers.

Savings and deposit accounts have also proved popular. Balances grew by £1.6bn, with customers tempted by high introductory offer rates. About 85 per cent of customers are sticking and migrate on to lower rates with the bank once offer periods end. Mr Gratton said: "We have beaten many expectations and significantly exceeded expectations on customer growth. I am very confident with our business model and our pricing strategy that we can attract and retain customers. "We now have a track record in being able to focus efforts on hitting targets."

Analysts reacted positively to the company's growth in customer numbers. John-Paul Crutchely at Merrill Lynch Global Securities says Egg has a sustainable competitive advantage in the UK because it manages to keep costs low and is backed by good technology.

Mr Gratton said Prudential is still supportive of Egg and has no plans to offload its interest in the company.