When it comes to borrowing can you bank on them?

Brian Tora: 'People prefer to shop around and switch mortgages to a better offer'

Love them or hate them, banks always seem to be in the news. This week has been no exception. On the one hand, you have the possibility of the bank universe contracting if Abbey National and Bank of Scotland succeed in agreeing the basis of a merger. On the other, the Bradford and Bingley Building Society is turning itself into a bank. What should the poor private investor do?

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Love them or hate them, banks always seem to be in the news. This week has been no exception. On the one hand, you have the possibility of the bank universe contracting if Abbey National and Bank of Scotland succeed in agreeing the basis of a merger. On the other, the Bradford and Bingley Building Society is turning itself into a bank. What should the poor private investor do?

The first thing to understand is that not all banks are the same. If you exclude the investment banks, the choice for UK investors lies between the mortgage banks, such as Abbey National, Halifax and Alliance & Leicester, and the more broadly based clearing banks, like Barclays, Lloyds TSB and, of course, Bank of Scotland. The mortgage banks are having a tough time of it. Not only does the housing market seem to have turned down, but competition is becoming fierce. While inertia amongst borrowers remains a factor, people now prefer to shop around and to switch mortgages if they become aware of a better offer. All this adds to costs for the lenders, who are increasing in number as insurance companies build their own banking capabilities.

It was not always so. When building societies first demutualised, many commentators viewed their lack of exposure to commercial banking as positive. But the market place is dynamic and the clearing banks are eroding the edge former building societies had through their cheaper branch networks. Britain still seems to be overbanked, but the consolidation of this industry will not be easy, not least because of the regulatory issues it will raise.

Take the Royal Bank of Scotland's bid for National Westminster. Concern was expressed that it would lead to a very large concentration of small business banking lying within the control of the enlarged group. For this reason, banks are more cautious over the idea of merging than investors appear to be, given the way bank shares have been marked higher in the wake of the Abbey National/Bank of Scotland news.

Into this maelstrom emerges Bradford and Bingley, which has been endeavouring to build a reputation as an independent financial adviser to counterbalance the rather negative press mortgage lenders are receiving. The outlook for Bradford and Bingley looks little better, though, than for similar banks. Members due to receive their windfall shares have the option to sell immediately on favourable commission terms, although past experience of demutualisation suggests there may be merit in waiting to see how interest develops in the shares once dealings commence.

There may be some good bets around for investors, though. Abbey National is unlikely to remain independent if Bank of Scotland continues to reject its advances. Halifax, too, could be in the frame. But the regulator will have his say. In banking mergers, as in anything, there ís many a slip . . .

* Brian Tora is Chairman of the Greig Middleton Asset Allocation Committee