Abbey National to go back to basics

Abbey National yesterday mapped out a back-to-the-future strategy to rebuild shattered profits by returning to its traditional mortgage and personal savings business.

The company is to shrink its corporate banking business, which has forced the group into making substantial bad-debt provisions, and pledged to consider any takeover approaches that might be made for the bank.

Announcing a 34% slump in first-half profits from £1.1bn to £697m, the chairman, Lord Burns, said: "What has happened in the last year has been a great disappointment... We have a lot to do. There has been damage and we have some way to go to rebuild trust."

Lord Burns took over day-to-day running of the bank last week, when Ian Harley was ousted as chief executive as a direct result of the slide in profits.

The bulk of the downturn was owing to a £242m write-off at the wholesale banking unit, the division which Mr Harley believed would turn Abbey from just another UK mortgage lender into a global banking group. It poured money into private equity projects and corporate bonds, many of which have been downgraded to junk status.

The shares, which have underperformed their sector by 15% this year, closed down 19p at 638p despite a 5% increase in the dividend.

Under Mr Harley's tenure the bank was courted by suitors. An offer from Lloyds TSB was blocked by regulators and there has been recent speculation that National Australia Bank might be ready to bid. Mr Harley was seen as fiercely protective of the bank's independent status and an opponent to any such deal. But Lord Burns said yesterday that he did not understand that attitude: "I don't know how any director of a public company can say independence is an objective.

"Your first objective is always to your shareholders. If issues of that kind come up then we will look at them on their merits."

He is also looking for a new chief executive, and said he would consider both internal and external candidates with a view to a rapid appointment: "I'm not going to let the grass grow under my feet on this one."

Abbey's new strategy is to concentrate on its retail banking, wealth management and long-term savings activities. Profits from those operations climbed 8% to £793m in the first half. The finance director, Stephen Hester, who is viewed as a leading candidate for the top job, said: "That is more than 100% of total group profit. It is the engine that is driving the business."

The idea is that those operations will now drive faster, and costs will also be slashed, although Mr Hester insisted there were no plans for job cuts.

The bank has had to pump £300m into its Scottish Mutual offshoot to bolster its solvency margins, but Mr Hester said Abbey's capital position was very strong and it was ready to put in more backing as required.

Profits at the wholesale banking business, meanwhile, slumped from £307m to just £50m as a result of the increase in bad-debt provisions.