Abbey's profits dive by ?500m

Abbey National will this week disclose a massive drop in half-time profits after taking a near £600m hit for sour corporate loans.

The scale of the fall, to around £160m from £697m this time last year, will underline the huge amount of work that still needs to be done by the bank's new chief executive Luqman Arnold, who took over from Ian Harley, who drew fire from shareholders over his strategy.

Under Harley, Abbey diversified away from its core mortgage business and lent money to companies, both here and in the United States, which were to stumble badly after the economic bubble burst three years ago.

At one time, Abbey had a £60m exposure to US industrial group Tyco, which faces allegations of accounting irregularities and fraud.

Earlier this year Abbey, Britain's sixth biggest bank, reported a £984 million loss, one of the largest in UK banking history.

Arnold and new finance director Stephen Hester are taking the company back to its retail roots while at the same time building up its personal financial savings operation, which includes insurer Scottish Mutual.

They have had some success: the shares are well off their annual low of 309p, to close on Friday at about 490p. But several thousand jobs are at risk over the next couple of years as Abbey looks for efficiencies. A revival plan, unveiled after chairman Lord Burns apologised to shareholders for the bank's decision to diversify from its core lending and savings work, has seen the group sell the First National car leasing operation to GE Capital.

Abbey has said it had £2.8 billion in junk bonds, corporate debt deemed to be sub-investment grade. Sales of these bonds at a loss are at the root of the write-downs to be unveiled this week. They will take some time to 'wash through' the group's accounts, say analysts.