Investment Column: A heady rating for Woolwich

WHATEVER you think about the rights and wrongs of building societies losing their mutual status, new shareholders are not complaining. After a few initial wobbles all the former mutuals have had a storming share price run since coming to the market. A combination of takeover fever, which has pushed the banking sector skywards, and a buoyant savings market has seen share prices take off in recent months.

Woolwich added to the enthusiasm surrounding the sector yesterday by announcing a special dividend, worth an average of pounds 105 each to investors who held on to their windfall shares. The group has also put aside up to pounds 200m for a share buy-back. The shares duly rose another 6.5 per cent to 395.25p

But is the market getting over-excited at Woolwich's prospects?

Underlying pre-tax profits, excluding conversion costs of pounds 53m, rose 16 per cent to pounds 455.7m. But much of that rise stems from activities outside the society's core business. More than half of the rise comes from non- interest income, such as commission paid to its independent financial advisers by other companies. Its profits were also flattered by substantial cuts in bad debt provisions, which has more to do with the recovery in the housing market than any Woolwich initiative.

And it has shown the same zeal for cost cutting as some of its rivals. Even leaving aside flotation expenses, costs came in at a disappointingly high pounds 362m, well above forecasts.

There are growing concerns about the bank's long-term business prospects. Even in a strong market, Woolwich's net lending virtually halved and its market share slipped from 7.5 to just 3.1 per cent. The other staple of building societies - retail bank deposits - saw an outflow of pounds 595m, reversing the inflow from carpetbaggers the year before.

Part of that can be explained by Woolwich's reluctance to take part in a mortgage price war, but it is difficult to see how it can win back market share easily, with prices likely to remain under pressure for some time to come.

A merger is always on the cards, but the higher the price rises, the less likely it becomes. Analysts forecast earnings per share of 20p for 1998, putting the shares on prospective p/e ratio of 20. Considering that rates the shares in line with Lloyds TSB, by far the most successful player in the market, Woolwich's shares are beginning to look very pricey.

Woolwich now has an uphill task to boost its lending and saving business. Shareholders would be wise to take some profits at these levels.