Prudential takes on the banks

JOHN WILLCOCK

and NICK CICUTTI

Prudential, Britain's largest insurance company, last night sent shock waves through the financial services industry by announcing it was about to move into retail banking.

Its plan to sell savings and mortgages down the telephone is seen as the beginning of a full-service banking operation and is the latest move in a revolution among banks, building societies and insurance companies which has seen nearly pounds 30bn worth of takeovers and acquisitions in the past 18 months.

Analysts praised the Pru's low-cost, high-profile approach, which is aimed at retaining some of the pounds 1bn-odd it pays out on maturing policies each year. Much of this is deposited with banks and building societies, the Pru said.

"It's a logical extension, a nice move," said Tom Bennett, insurance analyst at Paribas. Similar moves by insurers in Scandinavia had forced banks to raise their deposit rates to investors, he noted.

The Pru's pounds 70m investment in a phone banking launch comes hard on the heels of a series of deals in which banks, building societies and insurers have all reacted to a low-inflation, deregulated and highly competitive marketplace.

"The good news is that they're not buying an existing bank or building society. There have been concerns over the years that they might do so," said Nick Bunker, an ABN Amro Hoare Govett analyst.

Prudential's chief executive, Peter Davis, said in a statement: "We enjoy existing relationships with over 6 million customers in the UK and benefit from a well-established and well-regarded brand."

Prudential already arranges around pounds 700m a year in mortgages, using a panel of building societies and banks.

"Given this base, we believe we can build a substantial business in a short period of time," Mr Davis said.

The insurer is well placed to use its financial muscle, making profits of pounds 604m last year.

Prudential said it would apply to the Bank of England for a deposit- taking licence with the aim of offering a direct banking service using the telephone and post.

The recent pounds 15bn Lloyds Bank bid for TSB, following on from Lloyds' pounds 1.8bn acquisition of Cheltenham & Gloucester Building Society, highlighted the threat from the high street banks' expansion into mortgages and insurance.

Both Lloyds and TSB have led the "bancassurance" approach by cross-selling insurance and other products to banking customers. Lloyds TSB will be amongst the UK's biggest insurers as well as mortgage lenders.

The new head of Prudential's banking operation, Michael Harris, spearheaded the introduction of the then-revolutionary First Direct phone banking operation in the late 1980s and hopes to reverse this trend by stealing some of the banks' thunder.

Some analysts warned that big as the Pru is, it may still lack the sheer capital required to make a big dent in the high street banks' market share, not least because of the Bank of England's strict capital adequacy rules.

John De La Hey, an SG Strauss Turnbull analyst, said that in the short term, Prudential's move would be felt more by building societies than banks.

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