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MARKET COMMENT
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"The interim dividend is up 5% to 17.65 pence, consistent with the pre-close statement". In a results statement crammed with operating statistics, that one line reassured every Abbey National (LSE: ANL) investor this morning. With the bank's shares currently valued on a historic yield of 7.6%, news about the interim payout was uppermost in most shareholders' minds. Today's six-month results from Abbey provided the grim details forewarned in last month's profit warning. In short, pre-tax profits slumped from £1,054m to £697m. The major factor behind the decline was the hefty write-off within Abbey's wholesale banking business. Defaulting junk bonds helped provisions and losses total £272m in this division. However, Abbey issued some comforting words on the troublesome wholesale operation. This year is expected to be the "peak of the provision cycle" and while further write-offs are expected for 2003, these will be "substantially lower" than in 2002. That said, the division is "moving towards a more conservative provisioning stance" -- a remark that could leave the door open for further nasty surprises. Abbey's traditional banking businesses fared a little better. Pre-tax profits from mortgages, savings and insurance kept steady at £623m. Strip out the purchase of Scottish Provident, and pre-tax profits from 'wealth management' services increased by just £8m to £118m. Given the all-round flat performance, it's no surprise that "a priority of the second half and through 2003 is to thoroughly challenge the cost base across the organisation". Comments such as "leveraging customer relationships" and "attacking newer markets" were also prevalent. While bad debts, strategic issues and a rather forlorn industry position cast a cloud over the company, at 654p, Abbey shares look extremely cheap. If you believe the full-year dividend will rise 5% (to 52.5p), the shares will yield a stunning 8.0%. Even if a financial catastrophe hits Abbey and the second half payout was reduced from 33p to 17p, the shares would still yield over 5%. Abbey has does have its problems -- some temporary, some a little more fundamental -- but these are more than discounted in the share price.