View from City Road: Abbey suffers from its success

The UK housing market's creeping recovery - two steps forward, one step back - is still on a gradual upward course, which is good news for companies such as mortgage lenders.

Because investors are now convinced that the market is going up rather than down, their eyes are on stocks that can benefit from falling repossessions.

Abbey National, which announced its results yesterday, might look like a case in point. But it is less able to benefit from falling bad debts than its clearing bank rivals, ironically because it has been better at keeping them down in the first place. So far as shareholders are concerned, it is a victim of its own success. For instance, the former building society's bad debts represent only 0.5 per cent of its domestic lending, compared to 1.7 per cent for Lloyds Bank.

If Lloyds's bad debts were to fall to about 1 per cent, a reasonable norm when the housing market is healthy, it would add pounds 400m to profits. If Abbey, on the other hand, cut bad debts to 0.2 per cent it would only add pounds 150m to profits.

There are other reasons to wonder about Abbey National's longer-term prospects. It managed to increase its market share of UK mortgages in the first half but at a hefty price. Lower interest rates, the likelihood of fewer prospective base-rate changes, lower spreads on fixed-rate lending and increased competition will all put pressure on margins.

Which is not to say Abbey National is badly managed, although it did lay a rather spectacular egg in its French commercial property arm. The tales of out-of-control commercial property lending were almost reminiscent of Barclays' problems last year. Perhaps Abbey can now feel it has truly arrived as a clearing bank.