Abbey National reports rise in profits

Abbey National, Britain's second largest mortgage bank, today reported a 15% rise in first half profits, but an unexpected jump in bad debt provisions jolted the shares.

Abbey's chief executive, Ian Harley, said that Abbey was in "better shape than ever" after pre-tax profits for the six months to June 30 reached ?1.06bn. The figures come just two weeks after the trade secretary, Patricia Hewitt, blocked Lloyds' ?18bn bid for Abbey, on public interest grounds.

Strong performances from Abbey's retail and commercial banking operations accounted for the bulk of increased profits, which were broadly in line with City expectations. But worries about costs and a rise in bad debt provisions in commercial or wholesale banking knocked more than 4% off the shares, which traded down 52p at 1,185p in morning trading. The stock has outperformed the UK banking sector by 7% this year.

Concerns over the level of debt provision - money set aside to cover bad customer loans - is a key issue, as the economic slowdown poses risks for bank loans. Abbey blamed a slowdown in global markets for provisions jumping to ?64m from ?10m. Analysts said that Abbey's comments that it was on the lookout for possible acquisitions also heightened concern, pushing down its share price.

Abbey National had faced an unwanted takeover bid this year from Lloyds TSB. But since the deal was blocked on competition grounds, there has been speculation that Abbey might turn predator on some of the smaller players in the UK banking sector, such as rival mortgage lender Alliance & Leicester.

Abbey National has been diversifying from its traditional mortgage business, where profit margins are under pressure. Some 55% of profits now come from other business areas, such as commercial banking and life assurance.

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