Pru puts pressure on Abbey to merge

City institutions, led by the Prudential, are putting intense pressure on Abbey National to sell out or merge with a banking rival.

The revelation follows renewed merger talk in the industry, which saw bank shares soar last week.

According to banking sources, Abbey is maintaining board-level contacts with Barclays following talks late last year with a view to a possible friendly £40 billion 'white knight' merger.

The 'open door' approach comes despite Abbey's £2bn purchase of mutual life insurer Scottish Provident and Barclays' current £5.4bn takeover of the Woolwich.

Sources say Abbey chief executive Ian Harley first held private talks with Matt Barrett, his Barclays' counterpart, just before Christmas, prompted by fears of a hostile bid from Lloyds TSB. City financiers, however, now believe Royal Bank of Scotland is more likely to strike, after digesting its acquisition of NatWest earlier this year.

Abbey would also fit well with Bank of Scotland, which was last week the subject of talk of a deal with Abbey, Halifax or HSBC. This weekend, BoS sources refused to rule out a deal, but said no move was imminent.

Abbey insists it has an independent future, but has been hit by a slump in its shares. 'Harley has come under intense pressure to do a deal at meetings with institutions,' one source close to Abbey said. 'The Pru has been especially vociferous.'

Late last year, according to banking sources, Harley met Lloyds TSB chief executive Peter Ellwood twice, at Ellwood's insistence, during the Scottish assault on NatWest. The approach was rebuffed: a strategic review by new advisers Lehman Bros and UBS Warburg was used as ammunition. But Abbey has been on a 'war footing' ever since.

'Ellwood's tone was not very friendly,' one source close to Abbey said. 'Abbey would get two board positions and that was that. Barclays was much more friendly, and it is the preferred white knight. It has kept the doors open ever since.'

Lloyds TSB is interested in Abbey's mortgage and savings business. Its finance house, general insurance, treasury and banking operations would be sold. Barclays declined to comment; Lloyds TSB sources played down any hostile intentions.

In 1997, Abbey was in talks with NatWest, but Harley's predecessor, Peter Birch, was overruled by his board.

One analyst said: 'The market expects a deal. And if they don't budge, six months on, the temptation for Royal Bank to use its highly rated paper will be just too strong.'