View from City Road: Holes appear in the Abbey habit

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The Independent Online
ABBEY NATIONAL began life on the stock market as the clean-limbed young bank that knew what it was doing and did it well. This was not a product of the old clearing bank culture, lurching from disaster to disaster, but an outsider from the building societies, brimful of ideas and enthusiastic management.

The image has been dented somewhat, not least by the surprise decision to pull out of estate agencies just at the moment the cycle is turning, rather than try to capitalise on an expensive investment by returning it to profit. There are bottom-fishing investors around looking for estate agencies on the cheap, but Abbey is unlikely to get back much of the pounds 226m it has lost so far.

The sale disclosure follows concern about the loss-making foray into Europe, which like the move into estate agencies was based on that untrustworthy old friend in the financial services industry, long-term strategic thinking. The predictable result is a hole in earnings per share.

Looking ahead, the picture is not improved by the risk that pressure on margins will rise this year and that a high level of bad mortgage debts in the mainstream UK lending business will continue. The Government is, and will remain for a considerable time, the toughest competitor for savings. And Abbey has not yet covered its back by arranging reinsurance for future repossession losses.

There are bright spots, particularly the bravura display of Abbey's Treasury expertise, reaping profits of pounds 100m by deploying a third of the balance sheet - more than Woolwich's whole balance sheet - in the markets. Another pounds 30m of the pre-tax profit is accounted for by the addition of Scottish Mutual to the empire, but the in- house life company is making a good start.

A further pounds 101m of pre-tax profit is from the sale of unclaimed shares from the flotation. This is extraordinary in every sense of the word except the new accounting standards. And it can be safely ignored in assessing the group's continuing profits, as it would have been under the old rules.

The profit was offset by the pounds 126m write- down of estate agency goodwill, which tells us just as little about recent performance and has no effect on net worth. Under FRS3, it represents a recognition of past write-offs of goodwill, channelled back through the profit and loss account.

Abbey is still one of our best banks, with strength in specialisation. But there is no longer a strong reason to buy the shares.

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