Investing in old customers pays dividends for Halifax

James Crosby, chief executive of the Halifax, was finding it hard to control his exuberance as he announced the group's results for 2000.

Mortgage lending leapt by 69 per cent, giving it the highest market share achieved since conversion; its new current account has proved a runaway success; costs were held for the second year running and, Crosby claims, its consumer research shows it has recovered most of the ground lost over the past three or four years.

The performance certainly demonstrates what can be achieved when a company realises how important its customers are.

Halifax's problem lay not in attracting new customers but in stopping the ones it had from being tempted away by better offers elsewhere. Simply offering existing customers a better deal when their special terms expired has stemmed the flow. Only a quarter of them accepted, yet that was enough to push Halifax's market share up from 6 to 10.3 per cent.

Its current account has attracted 100,000 customers in two months by, as Howard from the Sheldon branch trills in the adverts, offering an 'extraordinary' interest rate of 4 per cent on all balances.

And last week, it announced that it was cutting its mortgage rate by 0.75 per cent and ending the discount given to attract new borrowers for its mortgage product. But such innovation does not come cheap: Crosby had warned that margins would fall and they duly did - from 2.25 to 2.12 last year, with a further 10 per cent likely this year and 3 per cent the year after.

Crosby is now promising to keep costs steady again this year - an ambitious target given that they have been static for two years.

Even so, Halifax's new-found affection for the consumer will have to attract substantial amounts of new business to keep profits moving ahead while margins tumble.

Crosby's contention is that he is simply leading the market to where it was heading anyway, and that being first gives it extra momentum.

A few other lenders - such as HSBC and Nationwide, which last week slashed its mortgage rate, too - are also ending special deals for new customers although others are sceptical. Given that some analysts believe returns on existing business can be as much as four times that of new business, it would not be surprising if others were looking closely at Halifax's experiment.

The margin pain in the mortgage business is being alleviated by excellent results elsewhere. St James Capital, in particular, is looking like a good investment, while Clerical Medical had another good year.

Crosby estimates that, following the Equitable Life deal, half its business will be outside its traditional areas. The City may not give it credit for that until the fears of a mortgage war are resolved.

The shares have had a good run but, if Crosby's strategy is successful, they could have further to go. Buy.

Is it time to panic yet?


Two weeks ago, a leading fund manager told the Observer that the outlook for British shares was good because the FTSE 100 index seemed to be able to stay above the 'psychological' barrier of 6,000.

Last week, the index tumbled below that for the first time in almost a year. In the meantime, profits warnings gather pace - Vocalis, Iceland, Tate & Lyle and BAe to name just a few recent examples.

So does that mean that we should panic and rush for the stock market exit? Many City analysts think exactly the opposite.

Steve Russell of HSBC, for example, thinks we are in the closing stages of a bear market: the market may have a little bit further to fall, but he is sticking to his target for 7,000 by end of the year.

If we have been in a bear market, it is pretty tame compared with the 20-year bull run which preceded it. True, the total return on shares - that is including dividends - last year was minus 8.6 per cent, but it followed one of the most spectacular years for equities.

The market's price-earnings ratio and dividend yield are still close to their all-time high. And the market may have dipped and risen, but it is still pretty much where it was two years ago: not great, but not that savage a bear market.

But the performance of the past two years has been severely distorted by the boom and bust in technology, which masked what was really happening in individual sectors.

By Russell's calculation, the prices of traditional businesses have now fallen so far that they are anticipating 10 years of earnings falling by 3.5 per cent a year. Over the past 10 years, the average has been 1 per cent. Surely that is now too pessimistic.

The technology sectors, however, are still discount ing growth of 10 per cent for the past decade - and that is after a 50 per cent dive in the Techmark index. Surely that is too optimistic.

That dichotomy goes some way to explaining the apparent paralysis of the stock market. Some investors think that technology shares are still too expensive, while others think it is time for bargain hunting.

But all are waiting to see what happens in the US. Will Alan Greenspan's rapid interest rate cuts mean that the US can avoid an out-and-out recession?

And how much will the technology sector be damaged not just by an economic slowdown, but by the unwinding of the over-optimistic stock positions which preceded it?

British technology companies are, if anything, even more highly valued that their US counterparts. Yet they have been responsible for more than a third of all profits warnings so far this year.

Despite that, some analysts, such as Michael O'Sullivan at Commerzbank, remain out-and-out technophiles, although he admits that it is important to sort out the good, such as IT hardware companies, from the cheap and miserable.

Others prefer old-fashioned business, such as builders and general retailers. Builders, in particularly, are discounting a slump far worse than they suffered at the start of the Nineties.

But all agree that the markets are likely to remain nervous until it is clear that the US is not about to enter a Japanese spiral of depression. Nervous investors are unlikely to suffer much from waiting a month or two before plunging in.