Egg wins more business but debt worries investors

With 2 million customers, the internet bank turned a fourth-quarter profit

Egg, the doyenne of the internet banking sector, unsettled investors yesterday after reporting an acceleration in customer recruitment accompanied by modest provisions against bad debts compared with its rivals.

Bad debts have been a key worry for banking investors as the economy has slowed, and Egg's transformation from a savings-based bank to one based around credit cards and unsecured lending has made it seem especially vulnerable.

The popularity of Egg's credit card, which charges no interest for six months, helped the bank recruit 600,000 new customers last year, up from 559,000 in 2000. Total customers now exceed 2 million.

While the strong customer growth saw bad debt provisions rise from £37m to £68m, the figure as a proportion of total loan balances was down. Jon Kirk, an analyst at Fox-Pitt Kelton, said it was a matter of concern that such a fast-growing enterprise as Egg had low provisions. "If Egg adopted the same policy on bad debts as Barclays, the charge would have been £35m higher," he said.

Paul Gratton, Egg's chief executive, said the group had not seen increases in claims on payment protection insurance or any other indications within its business of the wider macroeconomic slowdown. "If there was going to be an impact we would expect to have seen it by now," he added.

Egg prides itself on the affluence of its customers. They typically earn more than £30,000 and have average credit card balances of £2,600, some £1,200 more than the national average.

Pre-tax losses last year narrowed to £87.8m from £155m in 2000. Its UK operations, which turned profitable in November, had entered "sustained" profitability, Egg said, and provided a foundation for expansion into Europe and beyond.

The net interest margin more than doubled to 1.9 per cent as credit card balances that had been interest free under Egg's introductory offer became interest bearing. About 87 per cent of customers stick with Egg when the offer ends.

Mr Gratton said the quarterly rate of customer growth slowed during the fourth quarter although he expected the rate to hold steady at about 500,000 a year despite the internet offerings of high street banks having fully established themselves. According to market research by Mori, 33 per cent of Britons bank online, a 5 per cent increase in the past three months alone.

"We have a potential customer base of 8 million in the UK," he said. "Yes, there'll be stronger competition, but yes, I expect continued acquisition of customers too."

Egg plans to launch its brand in France in the third quarter this year after its recent £5m acquisition of Zebank, its French rival. "The French, like the British, think banks are a necessary evil but they want something better. But it is a different market, so we're not just going to replicate UK products over there," Mr Gratton said.

Egg's high-interest savings bank continued to see a decline in average balances in the aftermath of cuts to the interest rate, with total balances falling by £1.1bn to £5.9bn. Aggregate lending balances were £4.8bn, and Egg is planning to bolster the savings account with new offers aimed at keeping total deposits ahead of total lending.

Cross-selling of financial products such as mortgages and investment funds to the credit card customers contributed to an rise in average revenue per customer from £85 to £111. Egg is also planning to launch an investment platform on Microsoft's MSN portal.