MARKET COMMENT
Egg Needs to Execute

By Christopher Spink
February 19, 2001

Carburton Street, London -- Innovative Internet bank Egg (LSE: EGG) has seen its shares rise by nearly a fifth so far this year to 133p. That's only 16% below last June's 160p flotation price. The fast-growing bank has weathered the tech stock storm as investors admire the group's strategy and secure backing from majority shareholder the Prudential (LSE: PRU).

Today Egg delivered final results. Losses seem to be stemmed. On the pre-tax basis, these only rose 3.7% to £155.3m over the year. Indeed the group plans to break even by the final quarter of this year. Egg hopes to do this by continuing to grow its non-savings businesses. Operating income on this side rose 375% over the year to £93.2m.

It's easy to forget quite how revolutionary Egg was when it launched its first product, a savings account paying above the Bank of England base rate on balances of as little as £1. Commentators at the time said it couldn't be sustained. Sure enough the "hot" money has left, explaining the 11% fall in balances in this area to £6.7b. But Egg still guarantees to pay the base rate until the end of this year at least on savings.

Also smaller savers, with "colder" money, are still attracted to Egg. 559,000 net new customers joined the bank this year, meaning 1.35m customers have been acquired since launch in October 1998. This gives Egg critical mass.

Evaluating Egg's prospects

The perennial question is can Egg convert these savers to take out products that make Egg money as well as saving their customers cash? This becomes more pertinent now that Egg's competitors have caught up and in some cases overtaken it, for example take today's launch by the Nationwide of an ultra-low mortgage of 6.49%.

Certainly Egg's credit card looks popular. Over half of Egg's customers have one. The joint promotion with Boots (LSE: BOOT) boosted numbers in this area and balances stand at over £1b. There is less information on the mortgage and investment supermarkets Egg has set up. With today's announcement from the Nationwide, Egg will either have to cut its margins in this area or risk losing market share.

This problem could become overwhelming for Egg. The trouble with being the consumer's champion is that it must offer its customers the best value-for-money products. This affects Egg's own margins and may make it less of an attractive proposition for investors. However, continued customer growth, as experienced this year, and expansion overseas, mentioned in today's results, may compensate for lower profit margins.

Where Next?

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More Egg comment: 14th December 2000 ; 16th October 2000 ; Egg Duelling Fools