UK: Abbey breaks its habit

The problems have arisen out of a policy to take on higher risk lending business, which has proved disastrous as the UK economy has deteriorated.

Abbey has been subject to two bid-approaches in the past two years - Lloyds TSB in 2001 and Bank of Ireland in 2002. Both were rebuffed. Its share price has halved in recent months.

Abbey is the UK's second biggest mortgage lender and was one of the first building societies to demutialise and convert to a bank. Its move into commercial lending has exposed it to markets that it was not familiar with and may not have understood. Some blame is being placed on a move into wholesale banking. Its Treasury Services department has offices in London, Hong Kong and New York - a far cry from its history as the second biggest building society.

But the major blow may yet be to come: the UK property market which has been overheating for more than a year is faltering - a tendency that was entirely predictable by, seemingly, all but the experts: the same situation as was present before the property price collapse of the late 1980s. Now, property is sticking and prices are coming down but all lenders are already committed to loans based on prices that will soon be lower than that obtainable in the market. Chains are collapsing where previously speed was of the essence if a transaction was not to be lost. This will further impact on Abbey Nat, the UK's second biggest mortgage lender.

The Abbey strategy has not been disclosed but its decision to refocus on its core business suggests that it will return to its roots of deposit taking and lending on residential and small commercial property markets. But in doing so, its growth into other markets, a means of providing defence against aggressors, will be lost and it will again become a takeover target.

If that is Abbey's strategy, then the branch network looks set to be rationalised where a suitable suitor may be sitting next door in the UK's crowded high streets. The favoured bidder will be, either, one who has little or no high street presence in the UK or someone who already has considerable presence and wants to remove some competition. Abbey Nat and Lloyds TSB have much the same customer profile, and it is similar to that of Halifax/Bank of Scotland. But it is different to the Royal Bank of Scotland (which has just rebranded National Westminster from its dowdy black and grey image to an elegant navy blue). It is unlikely that any foreign bank would want to buy into the UK high street at this time unless they are taking a long term view. The problem is that the long term view of retail banking in the UK leaves out the high street branch network in favour of sales outlets with services provided in remote back offices. One of Abbey's problems arose from a campaign to remove passbooks and require customers to use ATMs. They said that the passbook accounts were being used as interest bearing current accounts instead of for occasional payments in and out and this added to congestion (for which read cost) in the branches.

But Abbey did not notice that customers, some of whom had been with the bank for more than 50 years, were ageing and the elderly hate ATMs. A backlash has caused a reversal of that policy.

Abbey Nat, which as a building society had a highly annoying but remarkably effective advertising campaign featuring a thumbs-up and the slogan "I've got the Abbey habit," is hoping that one loss does not make it appear vulnerable.

However, the scale of the loss, just under GBP1,000 million, is massive and customers have raised questions about the bank's viability.

These are, according to the accounts, to the FSA and the bank itself, unfounded but when Barclays first tipped into loss several years ago, the first major bank to do so for many years, it found confidence in it to be shaken. One customer reportedly wrote to the bank saying something like "I am concerned as to the risk of non-repayment of the money I have lent you and require you to provide security for it. Please nominate a branch of the bank over which I may take a mortgage." The bank, apparently, did not reply.

Whilst Abbey has not, so far as we know, been subjected to that sort of humiliation, its results are in stark contrast to its former building society rival Halifax (now known as Halifax-Bank of Scotland after its takeover of that bank). HBOS has posted creditable results in its first full year after the merger. It now has true national coverage and a growing international network. Its primarly rival for UK structure is Royal Bank of Scotland which bought National Westminster a couple of years ago. The integration of banking north and south of the border has meant a squeezing of smaller businesses. Bank of Ireland bought Bristol and West Building Society but it has proved a bad move. Lloyds TSB bought Cheltenham and Gloucester Building Society and has demonstrated how to successful integrate that type of business within a bank chain.