MARKET COMMENT
Five Banks To Think About

By Cliff D'Arcy
December 8, 2003

Until the late Eighties, Abbey National (LSE: ANL) was the UK's second-biggest building society and mortgage lender, behind the Halifax. However, in 1989, it stunned the building-society movement by converting to a bank and issuing shares to its owners (savers and mortgage borrowers). Recently it re-branded itself as Abbey, although the plc name remains unchanged.

Since then, many large building societies have followed it and taken the plunge into listed status, among them:

• Alliance & Leicester (LSE: AL.)
• Bradford & Bingley (LSE: BB.)
• Halifax - merged with Bank of Scotland in September 2001 to become HBOS (LSE: HBOS)
• Northern Rock (LSE: NRK).

Others went down the takeover route, including:

• Birmingham Midshires - acquired by Halifax in April 1999
• Bristol & West - acquired by Bank of Ireland (LSE: BKIR) in July 1997
• Cheltenham & Gloucester - acquired by Lloyds TSB (LSE: LLOY) in August 1995
• Woolwich - floated in July 1997 and then acquired by Barclays (LSE: BARC) in October 2000.

So, how have the listed ex-building societies fared post-flotation?

Company          Flotation date   Issue Price (p)   Current Price (p)   Return%
Abbey National      13/07/89          154               519.5            237
A&L                 22/04/97          566.5             874               54
HBOS                03/06/97          733               714.5             -3
Northern Rock       02/10/97          463               680.5             47
B&B                 05/12/00          244               305               25

Abbey National's share price has suffered in a spectacular fall from grace over the last five years, having peaked at 1435p on 27 April 1999. Ignoring dividends, its shares have returned just over 6% a year - hardly an impressive result for long-term shareholders, from what was once one of the market's best blue-chip performers.

Bradford & Bingley has splendidly out-performed the FTSE All-Share since its flotation four years ago, rising 25%, compared to a fall of 20% for the UK market as a whole.

Of the clutch that floated in 1997, Alliance & Leicester edges ahead of Northern Rock to emerge as the winner. However, HBOS - the largest of the ex-building societies and still Britain's biggest mortgage lender -has disappointed, with its shares down slightly over the last 6½ years and fractionally under-performing the wider market. Despite this, I'm hanging on to my HBOS shares for now, simply because I've no need of the money at the moment.

So, which of these five will be the winners of the future? Well, I've held shares in all of them at some point, bar Northern Rock, which I believe has further to go.

Also, I think Alliance & Leicester looks pretty attractive, especially as this morning's trading statement shows that it is hitting its targets. Furthermore, the recurrent takeover talk could eventually result in A&L falling to one of its larger UK rivals, or a foreign firm. Its shares yield 5% and trade on a P/E of a little over eleven.

More: Banks Still Look Attractive | More On Northern Rock | Why Banking Shares Are The Best.

The author owns shares in HBOS.