Abbey returns to roots

Abbey National yesterday announced a three-year strategy to persuade the City it can survive as an independent entity after reporting an unprecedented near £1bn loss and a halving of its dividend.

Luqman Arnold, the new chief executive, said he aimed to turn Abbey into the "largest pure play" bank in retail financial services. This meant that the only thing the bank was going to do was traditional high street banking after learning the lessons from the damaging and costly expansion by the previous management into high-risk bonds and leasing trains and planes.

Abbey shares lost most of their early gains as analysts expressed scepticism about Mr Arnold's plan to boost service to its 16m customers and sell them more financial products.

The shares, which were given to 5.5m account holders and mortgage customers at 130p during Abbey's stock market flotation in 1989, rose 5p yesterday to 378p after reaching more than 400p in early trade.

"They get 10/10 on what they are doing on risk neutralisation but the rest of the strategy is woolly," one analyst said.

The bank was driven from a profit of £1.4bn in 2001 into a loss of £984m by three main factors: £1.1bn write-downs for goodwill incurred during previous acquisitions, particularly insurance company Scottish Provident; £902m of provisions inside the wholesale bank; and changes to accounting policies for the insurance arm of £632m. Without these problems, Abbey said its core personal financial services arm would have made a profit of £1.2bn.

Mr Arnold admitted the bank had a "long hard process" over the next three years to turn the bank around. He aims to take £200m of costs out of the remaining retail business by the end of 2004.

His boardroom colleague Stephen Hester, hired as finance director, is now becoming chief operating officer to take responsibility for the parts of the business that Abbey no longer wants to keep.

These are being placed in what is being called the portfolio business unit, which largely includes investments in bonds and other financial instruments. Mr Hester, like Mr Arnold a former investment banker, said that these investments had already been cut by £12bn in the second half of 2002 and by a further £7.7bn since the year-end.

For the first time Abbey disclosed the scale and nature of its investments, £2.8bn of which are now rated "junk" while others are what are known as collateralised debt obligations - instruments that the financial services authority has described as "toxic waste".

Mr Hester said he felt Abbey had set a new standard of disclosure for the entire banking industry. The bank has pledged to return whatever it makes in profit from the sale of any unwanted investments, though City analysts were sceptical about how much this would give to shareholders.

Abbey also revealed it had injected £866m into its cash-strapped life insurance business in 2002 and topped it up with a further £100m since the start of the year. He also acknowledged that it would need to put in more money again if the FTSE 100 fell towards 3,000 points.

The bank is looking for two new executives to run human resources and one of its new customer focused arms.