Outlook: Sir Peter risks over-egging his case

SIR PETER DAVIS, chairman of Prudential Corporation, makes an unlikely Internet entrepreneur, but then so did Sir Stanley Kalms at Dixons, and just look at what Freeserve has done for him. Sir Peter's stab at the World Wide Web, Egg, is costing him quite a bit more than Freeserve cost Dixons - pounds 300m and rising - nor is it such a "pure" Internet play as Freeserve, as it combines now somewhat passe telephone banking with the more gee-whizz online operation.

However, that hasn't stopped some Wall Street and City pundits putting a valuation of pounds 1bn and upwards on Egg, or about pounds 1,500 per customer. This is perhaps just as well for Sir Peter for, as already noted, Egg has had to pay through the nose for its new customer base while profits in the rest of the group have been bombing. The Pru's share price, although down on a year ago, has outperformed the sector quite markedly over the last twelve months - a phenomenon that can be almost entirely attributed to Egg.

Is this in any way justified? The answer depends on where you are coming from. Customers at a traditional high street bank like Barclays are valued a good deal more highly than pounds 1,500 each, Egg has been successful at attracting a very high quality of depositor, with the average deposit per customer at pounds 17,000, and internet banking is cheaper per transaction by an order of magnitude than traditional banking. So in theory this valuation might seem more on the conservative than the fanciful side.

Moreover, Egg and others like it have plainly got traditional bankers badly rattled. The low cost newcomers might have taken anything up to 3 per cent of the UK retail deposit base since they started popping up all over the place a few years ago. From a standing start less than a year ago, Standard Life alone is taking more than 15 per cent of the new mortgage market. Such numbers are a bit more than a pin prick and must surely be worth something.

The established players sniffily dismiss the newcomers as "rate tarts" and insist, with some justification, that anyone can buy a customer base. Holding onto it, and making a profit out of it, is something else, they say. Take yesterday's initiative from Egg - what, at 5.59 per cent, it claims is the lower variable rate mortgage in the country. Were it not for the taxman's take, it would now be possible to borrow from Egg at 5.59 per cent and lend it back for a profit at a deposit rate of 5.75 per cent. No banker ever made a profit out of a negative spread, however low his transaction costs.

Cross selling of other more profitable products into the new customer base is one way of making up the difference, but so far Egg customers have proved resistant to all such attempts. This is hardly surprising. High quality and high net worth Egg's customers might be, but this is likely to mean they are also a good deal more sophisticated and promiscuous than the average banking customer. These are the sort of people who do not like to be taken for a ride by bankers or anyone else. They'll chase the best rates and buy the best products, and it is hard to see how Egg is ever going to make money out of them

Sir Peter is nothing if not a consummate salesman and certainly he's managed to convince many that Egg is the Pru's future. His shareholders will be hoping he's right, but he's in danger of more than a little over- egging the case.