Takeover fever as Midshires talks

The conversion and takeover speculation among banks and building societies reached a new pitch yesterday as Birmingham Midshires responded to rumours of a pounds 650m takeover by Royal Bank of Scotland by saying it was viewing its future "with an open mind".

Abbey National's chief executive, Peter Birch, added to the debate by telling Britain's 72 remaining mutuals to diversify from low-margin savings and loans business or face a bleak future of diminishing returns.

Mr Birch was speaking as Abbey National kicked off the banking reporting season with a 23 per cent rise in pre-tax profits despite disappointing new mortgage lending and a fall in deposits thanks to a flood of money into mutuals such as Nationwide.

He warned that the issue of conversion would not go away at Nationwide and said he believed the "rebel directors" defeated at last week's annual meeting would not give up their fight.

The Royal Bank of Scotland refused to comment on speculation it was discussing a merger with Birmingham Midshires, but the Scottish bank has stated publicly its desire to expand its retail banking operations south of the border. Announcing record first-half figures, Midshires said it had taken no decision on its future corporate structure.

Reports have suggested a pounds 650m bid for the building society, putting its 1.2 million members in line for a pounds 500 windfall. Last week the society shut its doors to new savers after reporting a deluge of carpet-baggers looking to secure a slice of any windfall payout on conversion or takeover.

The trend towards the eventual elimination of the mutually owned building society appeared to have been dealt a blow last week when five rebels failed in their bid to be elected to the Nationwide board on a pro-conversion ticket. But Mr Birch's comments fuelled the argument that the days of mutuality were all but over.

He said Abbey National had seen the changes sweeping the financial services sector eight years ago when the bank became the first building society to convert. One of the reasons for that decision had been the realisation that the largest growth in the sector would no longer be found in the traditional businesses of mortgages and savings accounts.

Abbey National's first-half profits rose 23 per cent to pounds 687m before a one-off pounds 67m hit to its leasing business from the proposed change to the corporation tax announced in the budget. Analysts said a key feature of the figures was a squeeze on margins in the traditional core mortgage and savings operation.

Abbey National's market share of UK mortgages was put at 14.3 per cent at 30 June, up from 12.1 per cent at the half-year stage the previous year but down from the full-year 1996 figure of 14.7 per cent.

Despite the squeeze, Abbey's shares closed 36p higher as the market focused on a review of dividend policy that will see excess capital progressively handed back to shareholders.

Comment, page 17