The UK mortgage market has shrunk to pounds 25bn this year from pounds 40bn in 1988. Abbey National is the country's biggest mortgage lender, but its home loan market share is dwindling as it gets more difficult to find quality borrowers and as the clearing banks return to the market.
Turnover in the housing market is sluggish as prices continue to fall. The buoyant savings market is growing more competitive - National Savings products are taking a growing share and cutting significantly into Abbey's livelihood from that sector.
The bank's attempt to revitalise the housing market with its tax credit proposal underlines how pessimistic Abbey executives are about housing market prospects. They said clearly that there was no evidence yet of recovery.
Abbey National's pounds 270m pre-tax profits disappointed the stock market because they were at the low end of expectations. Provisions for bad debts, at pounds 138m, were a record and UK provisions trebled from the same period of the previous year.
On the plus side, profits before provisions rose sharply, up 12 per cent to pounds 435m. Net interest income increased. The group's treasury operations nearly doubled pre-tax profits.
The bank was strong enough to buy a life insurance company, Scottish Mutual, and start its own insurance arm. It increased the dividend by nearly 9 per cent to 8.3p and remains well capitalised.
Abbey is a bank unlike any other on the high street because of its niche as the biggest mortgage lender. Until now in the recession its single-minded concentration has kept it out of the murky waters of corporate lending. Because it is well-managed it is faring better than other mortgage lenders. But its fortunes are still tied inextricably to the housing market.
Repossessions and arrears are still high, even though they are coming down. The number of houses Abbey has repossessed has climbed. The fact that it is so linked to the housing market means that investing in its shares is tantamount to a bet on the direction of house prices.
The shares at 255p are a hold now, but could be an early beneficiary when the economy and the housing market recover.
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