MARKET COMMENT
Abbey National To Cut Its Dividend

By David Kuo (TMFDragon)
November 27, 2002

The trading statement from Abbey National (LSE: ANL) this morning confirmed what some people had been expecting for a while now. The UK's second-biggest mortgage lender said it expects second-half trading profit to be lower than the amount it produced in the first half. Throw in some charges for write-offs at its wholesale banking unit and Abbey is likely to post a bottom-line loss for the full year ending 31 December. Some expect the deficit to be almost £1.5b compared to a profit of £1.9b last time. Abbey National also said that the present dividend level is not expected to be sustained. Presumably that is the PC version of saying that dividends would be cut.

The new chief executive Luqman Arnold has had five weeks to take a look at the books at Abbey National. He hasn't left in disgust so things can't be that bad at the UK's fifth biggest bank. Abbey's scale of operation is perhaps not quite as big as Arnold, a veteran of the banking industry, has been used to. But the task in hand is almost as tough as the ones that he had to face at UBS. It was at UBS that Arnold gained a reputation for containing costs and this topic was a recurring theme in today's update. Additionally, Abbey said it would build on its strategy of re-focussing on personal finance services in the UK.

Banking is not an especially difficult industry to understand. Banks borrow money (taking deposits from the likes of you and me) and pay interest on the money. Banks also lend out money and difference between the interest received and the interest paid out is the profit that it makes from its operations. In the case of Abbey National, it made loans to certain companies such as Enron that have subsequently gone bankrupt. That is one of the more unpredictable aspects of banking, namely the risks associated with lending money. Abbey National wasn't the only bank to be caught out by Enron. But as one of the smaller players it was hurt worse than most.

Today's announcement from Abbey National does not make the company any easier to value. The position is unlikely to be much clearer when the company delivers its full year figures on 26 February either. However the refocusing on personal finance services coupled with the cost reduction programme should help to reassure investors. This move into less risky lending may not deliver the 10% earnings growth that the bank has enjoyed in the recent past. However at 635p most, if not all, of the bad news possible has been factored in.