Abbey broker drives shares to eight-year low

Abbey National was pummelled on the stock market yesterday when its broker took the unusual step of issuing the equivalent of a "sell" recommendation on its shares.

The advice to "reduce" any holding by analysts at UBS Warburg drove Abbey's shares to eight-year lows of 413p, almost 10% down on the day, before they recovered ground to end 5.5% lower at 440p.

In their analysis of Abbey, Warburg's analysts set a price target of 380p and predicted that the high street bank would cut its dividend by 50% and report a loss of £1.5bn for next year.

While Abbey's new management had already warned the City it would report a hefty loss and cut its dividend, Warburgs' report came as a shock because the Swiss-owned bank is one of Abbey's official brokers. Lehman Brothers, which also acts for Abbey, is already reviewing its share price target of 805p.

The report was also issued during a bleak period for the FTSE 100 index, which closed yesterday at its lowest level since December 1995.

Abbey's 5.5m account and mortgage customers were given free shares when it changed from a building society to a bank in 1989 and floated on the market at 130p.

Shortly afterwards it began a rapid diversification strategy into wholesale banking, ranging from buying bonds to trains and planes which is now being unwound by new chief executive Luqman Arnold.

Warburg pointed to this history in its research. "The sins of the past being visited on current management and shareholders are rooted in the group's development over the near 14-year period since flotation in 1989.

"For those shareholders to have been in Abbey National since its flotation, it has been better to travel than arrive," the Warburg analysts said.

Despite rumours in the City that the research note was issued because Warburg was soon to lose Abbey National as a client, it is understood that this is not the case.

Abbey has a long-standing corporate relationship with Warburg and City sources pointed to further links as Mr Arnold, the new chief executive, used to work at the Swiss parent company.

Mr Arnold is due to present his first set of results to the City next month after being recruited in the aftermath of management shake-ups that included the departure of former chief executive Ian Harley.

Abbey has been dogged by bid speculation since its previous management thwarted a number of approaches. Warburg analysts Tim Sykes and Iain Smillie believe fresh bid speculation may be justified if the shares fall below 363p.

"In their more frustrated moments, shareholders may refer back to the fact that Lloyds TSB once bid up to £13 [per share] for this group," they said. But they pointed out that Abbey's new management is trying to refocus it purely as a retail bank and is "realistic" about its prospects.