London NW1 6XL
Total Assets: £204.4 billion ($291.92 billion) (2000)
Stock Exchanges: London
Ticker Symbol: ANL
NAIC: 52211 Commercial Banking
Abbey National has a massive customer base, a powerful brand that people trust, proven products and services, an integrated distribution network with demonstrable fulfillment capabilities and financial strength. In the world of the hybrid organization--bricks and clicks, high touch and high tech, call it what you will--Abbey National will be a winner.
1849: National Freehold Land and Building Society is established.
1874: The Abbey Road & St. John's Wood Permanent Benefit Building Society is established.
1944: Abbey Road & National Freehold merge to create the Abbey National Building Society.
1989: Abbey National converts to a plc.
1996: Abbey National merges with National and Provincial Building Society.
2000: Cahoot, a separately branded e-bank, is created.
In the short time that it has been a publicly traded company, Abbey National plc has grown into one of Britain's largest banks. Preferring to emphasize its roots as a building society, Abbey National avoids calling itself a bank as much as possible, despite the fact that retail banking services and wholesale banking operations contribute greatly to its bottom line. Through subsidiaries Abbey National also offers life and general insurance. In addition, it has been very active in taking advantage of the Internet and digital TV to reach new customers.
Origins in the Building Society Movement of the 1800s
Abbey National plc has a long history, growing to become Britain's second largest building society from its 19th-century roots as two separate entities: the National Building Society, established in 1849, and the Abbey Road Building Society, founded in 1874. Later Abbey National became the first such society to convert to a public limited company.
Building societies originated as mutual groups, known as 'friendly societies,' which proliferated during the urbanization trend of the mid-19th century. As towns and cities swelled, a substitute was needed for the social support traditionally offered by the community in rural areas. The first friendly societies were early forms of insurance--self-help organizations whose members paid regular subscriptions and were entitled to financial help from the group's funds when necessary. From this general concept evolved the 'building clubs' of the late 18th century. These were temporary organizations formed to build houses from money collected from subscribers; they were dissolved once that purpose was accomplished. The first known permanent building society was established in 1845, just four years before the National came into being.
The National's founders (among whom were the social reformers and members of Parliament Richard Cobden and Joseph Hume) had a political rather than a commercial agenda. In an age when voting rights were heavily restricted and tied to land ownership, they sought to increase suffrage by increasing the number of those who owned the freehold on their land and were thus entitled to vote. Essentially, then, the National was a land society, not a building society, and was popularly known as The National Freehold Land Society. It was officially named The National Permanent Mutual Benefit Building Society to give the association a legal framework under the Building Societies Act of 1836. The new organization enjoyed tremendous initial success, though not exactly in the way its founders had intended. Relatively few members took electoral advantage of their new status; most were far more interested in the National as a savings and loan institution, and in building on their new land.
Britain in the mid-1800s was economically buoyant and socially progressive. More people were earning more money than ever before, industry was booming, the population was growing, the railroads were revolutionizing travel and communications, and society was becoming ever more urbanized. Yet only a tiny proportion of the population owned their own homes. There was great demand for the National's 30 shares, and within four years the society was the largest of its kind in the country.
Under the 1836 Building Societies Act, societies were not permitted to own land themselves, so the National held its land in the name of trustees until 1856, when it formed the British Land Company for that purpose. With this division of operations, the National moved a step closer to becoming a building--rather than a land--society, a process completed in 1878 when the National and the British Land Company separated.
Unlike the National, the Abbey Road Building Society was formed in recognition of the growing need for home ownership. An outgrowth of a self-help organization, the Abbey Road Baptist Church's benefit society, the association was masterminded by Frank Yerbury, a builder, to purchase houses for its 500 members. Led by conservative directors in its early years, the Abbey Road enjoyed modest but steady success.
Building societies suffered a setback toward the end of the 19th century. In 1892 the Liberator, one of the National's principal competitors, was forced out of business by a combination of unwise speculation and fraud. In the wake of the scandal, tighter government controls were instituted on building societies, and public confidence was severely shaken.
The Abbey Road, and particularly the National, suffered along with the others. But the societies' fortunes improved at the beginning of the 20th century, when an affluent middle class was growing and demanding suburban housing developments. In the cities, much of the older housing had degenerated into slum areas and needed replacement. Another crisis in public confidence occurred in 1911, however, caused by the failure of the Birkbeck. Technically a building society, the Birkbeck operated more as a bank (only ten percent of its assets were in mortgages), but nonetheless its fall caused panic among building society investors and gave pause to building societies (such as the National) that had harbored thoughts of branching out into banking operations. Indeed, a comment made early in 1912 by the National's chairman tried to allay investors' fears: 'Now, in the case of the National, we have never done anything, and we never mean to do anything, which remotely or indirectly suggests banking. We never have, and we never will.'
World War I curtailed the activities and products of the building societies, and following the war the Liberal government dealt them a further blow by declaring housing for the poor the province of local authorities, giving the building societies their first real taste of how party politics could affect their business. Nonetheless, the interwar years proved, on the whole, prosperous. In 1923, under a Conservative government, a Housing Act was passed to provide a subsidy to private enterprise for house building. Another great building boom was taking place. Whereas in 1919 fewer than ten percent of the population owned their own home, by 1938 that figure had grown to 25 percent.
During this period the Abbey Road prospered. Under the leadership of Harold Bellman, who favored bold initiatives and--heretofore unusual in British business--aggressive marketing, the Abbey Road rocketed from sixteenth to second place in the building society hierarchy. In 1921, the Abbey Road had £1 million in assets; by 1925 assets had risen to £3.6 million and by 1929 to £19 million. For the first time the society ventured out of London; branches were opened in Southend, Watford, Reading, and Blackpool. By 1935, the Abbey Road had 110 branch outlets and employed more than 500 people.
Meanwhile the National, though it had slipped from the high position it had enjoyed in its earliest days, continued on a prosperous course, though it could not compare to the spectacular rise of the Abbey Road at that time. In 1929, Bruce Wycherley took over operations, introducing more modern commercial ideas and machinery, improving profits, and opening new branches. By the late 1930s, the society had a dozen U.K. branches.
Formation of Abbey National in 1944
Business suffered with the outbreak of World War II. Staff shortages were chronic, building materials were lacking, and less building work was being undertaken. As with the Great War, it was a time of stagnation for building societies. Nevertheless, as the end of the war approached, the Abbey Road and the National signaled their intention to continue to expand in the expected postwar boom by announcing, in 1943, their decision to merge. The move became official the following year.
Because the Abbey Road was the second largest building society in the United Kingdom and the National was the sixth, their merger made the new Abbey National a formidable force indeed. But this force was blunted, temporarily, by the postwar Labour government, which embarked on an ambitious program of state-financed building. Almost a million new homes were built and rented by the government.
The building societies still prospered, however, as savings and loan institutions, and by 1951 a Conservative government sympathetic to the building societies' aims had taken power. Party politics continued to ebb and flow, but the 1950s and 1960s were years of expansion for most building societies, and the Abbey National's record was one of steady growth. The demand for privately owned housing was still on the rise (in the 1960s the proportion of owner-occupied houses reached 50 percent), and the Abbey National was firmly ensconced in second place in this favorable market. By the end of 1962, the Abbey National could boast assets of £500 million&mdash compared with £80 million at the time of the two societies' merger. By 1968, assets had reached £1 billion and the society had nearly 150 branches. Within a few years the Abbey National's assets had doubled and it was opening a new branch office every other week. New products and services were introduced, including Bounty Bonds, which offered life insurance as well as an increased range of savings and property bonds.
The early 1970s were troubled years financially for the country, with house prices, mortgage rates, and inflation all rising dramatically. On two occasions the government offered loans to the building societies in an effort to keep interest rates down. While economic commentators might argue over whether the building societies were partly to blame for these bleak conditions or whether they were simply victims of the prevailing economic winds, from the societies' point of view their profits and expansion were affected little by adverse conditions. In 1979, the Abbey National had 500 branches across the United Kingdom and assets of £5.8 billion.
Clive Thornton became chief general manager and instituted a number of new initiatives designed to bring Abbey National a higher profile in 1979. An office was opened in Brussels, Belgium (the first overseas office of any building society), the society participated in a loan scheme to renovate housing in inner-city areas, and it introduced various new savings and loans opportunities to attract new customers and offer existing ones more choice. (Thornton even capitalized on the company's address of 221 Baker Street by marketing Sherlock Holmes souvenirs.)
Abbey National's move into areas previously the province of banks was gradual but inexorable. In 1983, it announced its intention to withdraw from its agreement to keep its interest rates in line with those recommended by the Building Societies Association. Under Peter Birch, who succeeded Thornton as chief executive in 1984, the society continued its trend of providing more and varied banking services to its customers. The Abbey National offered improved transaction services, more comprehensive insurance coverage, an increased number of service products--including conveyancing, structural surveys, and financial counseling--and more credit options. In 1988, interest-bearing checking accounts became available to all customers for the first time and the society established a national real estate agency under the name Cornerstone. The result of all this activity was that Abbey National (still firmly in place as the second largest building society in the United Kingdom, with assets of more than £31 billion and more than nine million members) had moved into areas of direct competition with banks.
Although the continually evolving legal definition of building societies allowed such diversification, the Abbey National came to believe that it could operate more efficiently and competitively as a public limited company. As a building society, the Abbey National was prevented by law from diversifying into new businesses, restricted in its capacity to raise capital, and limited in its access to wholesale markets. Especially irksome were the restrictions on the provision of unsecured lending; under the conditions laid down by the 1986 Building Societies Act, a society could have only 15 percent of its assets in that category, whereas a bank was free to do as it wished.
Abbey National's Conversion to plc in 1989
Intense interest was sparked by the board's proposal to go public, announced in 1988. The conversion of a building society to a public limited company was unprecedented. With no established procedure to follow, the implementation of the plan took a full year. The Bank of England had to carry out a review to grant a banking license. The Building Societies Commission had to be consulted every step of the way. Teams of lawyers ironed out legal questions and potential difficulties. Most important, Abbey National had to inform the public and its members of the ramifications of the proposed change in status. To that end, the society organized a massive media campaign, even including 17 public 'roadshows' held at various locations around the country where members could ask questions directly of Abbey National's directors.
An opposition group was formed, called Abbey Members Against Flotation, which tried to stop the conversion, accusing Abbey National of underhanded practices in presenting the matter to its customers. There were questions over the fairness of certain proposals; for example, Abbey National had offered to give each member 100 free shares of the new company, but this did not apply to minors, and in the case of joint accounts, only the first-named was to receive shares (invariably, critics pointed out, the husband in married couples' accounts). Opposition and doubts notwithstanding, when it came to the test, of the 65 percent of members who voted, 90 percent voted to go public. On June 6, 1989 the Building Societies Commission officially confirmed Abbey National's conversion to a public limited company.
The controversy did not end with the vote, however, for the flotation was attended by administrative mismanagement and farcical mishaps. Thousands of letters and share certificates were sent to incorrect addresses, refund checks failed to be sent at all, countless people received the wrong number of shares, and in one bizarre and mysterious incident share certificates were discovered burning in a skip outside one of the mailing houses.
Abbey National's success made people forget the debacle of the changeover. It increased its share of the mortgage market by acquiring, in 1994, the U.K. residential mortgage business of the Canadian Imperial Bank of Commerce, retitled Abbey National Mortgage Finance. It was becoming increasingly apparent, however, that the key to future growth for Abbey National was diversification. Home ownership had reached a mature state in the United Kingdom, so that mortgages were becoming stagnant. In 1994 outstanding mortgages grew at only five percent over the previous year.
In 1993, the company acquired a new subsidiary, Abbey National Life, which, together with the previously acquired Scottish Mutual, enabled Abbey National to provide its customers with wide coverage in life insurance, long-term savings, and pension products. The company expanded its business in derivatives, having established in 1993 a joint operation with Baring Brothers & Co., Ltd., called Abbey National Baring Derivatives. In addition, the bank established operations in several European countries.
But not every attempt to broaden its range of products met with success. In 1990 Abbey National purchased the French bank Fico France, which serviced the commercial property market, the crash of which in the early 1990s brought significant losses. Abbey National also sold its British real estate agency, Cornerstone, in 1993 after four consecutive years of negative returns.
Despite setting a goal of lowering retail lending that accounted for 80 percent of its bottom line in 1994 to just 60 percent by 1997, Abbey National in 1995 made a bid for the National & Provincial, Britain's ninth largest building society. The merger, completed in August 1996 at a cost of £1.35 billion ($2.15 billion), increased Abbey National's share of the home loan market from 12 percent to 15 percent, making it Britain's second largest mortgage lender.
Abbey National, in the meantime, continued its efforts at diversification. It acquired Pegasus Assurance Group for its Scottish Mutual subsidiary in order to add health insurance to the product line. It acquired First National Finance Corporation, which offered home improvement loans, personal loans, and car loans; later, to augment the subsidiary, it purchased three businesses from NatWest Group: Lombard Tricity Finance Ltd, Lombard Motor Finance, and Lombard Business Equipment Leasing Ltd. In 1996 National Abbey acquired Wagon Finance Group, a major U.K. used car finance company; a year later it purchased Cater Allen Holdings Plc, which engaged in the business of wholesale money markets and offshore banking, as well as onshore retail banking.
In 1998 Ian Harley, after 20 years with the firm, became the chief executive officer of Abbey National. He inherited control of a bank that had doubled its profits over the previous five years and, in terms of market capitalization, had grown to become Britain's fifth largest bank. Abbey National's success also made it a rumored acquisition target of larger players, such as National Westminster and Barclays. Harley vowed to increase revenue between two and three times over costs within three years. He lost credibility when 18 months later he had to back down from his numbers. Nevertheless, under Harley's leadership Abbey National had, by 2000, lowered its mortgage and savings business to just 50 percent of profit.
Abbey National also looked to make itself a consumer-friendly brand through innovation and technology. It opened retail outlets in Safeway supermarkets, Britain's third largest chain. It opened Costa Coffee cafes in some smaller branches and teamed with Costa Coffee to open a nontraditional banking superstore. Abbey National created a digital banking service with Sky Digital's interactive television capabilities. After offering e-banking services, Abbey National launched Cahoot, a separately branded e-bank that in addition to financial services teamed with vendors to offer an array of products and life-style services, from CDs and computers to travel plans.
By 2000, with the banking industry undergoing a cycle of consolidation, Abbey National appeared that it might become a victim of its own success. Unless it grew too large to be swallowed, the bank was a prime takeover target. It began merger talks with the smaller Bank of Scotland (BoS). The combination of the two would create an entity that could seriously challenge the big four high street banks: HSBC, Barclays, Royal Bank of Scotland, and Lloyds TSB. It was Lloyds that would inject itself in the Abbey National-BoS talks by making an offer to purchase Abbey National, which was quickly rejected. On one hand Lloyds was concerned about the potential of a combined Abbey National-BoS; on the other, the acquisition of Abbey National would make Lloyds the second largest bank in Britain. Once Lloyds made its offer official in early 2001, a prolonged regulatory process and uncertainty was assured. Lloyds promised to retain the Abbey National brand, so that the former building society was destined to continue on. The question of size and control was all that seemed to remain unanswered.
Principal Subsidiaries: Abbey National General Insurance Services, Ltd; Abbey National Leasing Companies; Abbey National Life plc; Abbey National Treasury Services; Cater Allen International Ltd; First National Bank plc; Scottish Mutual plc.
Principal Competitors: HSBC Holdings; Barclays; Lloyds TSB; Citigroup; Halifax.
'Abbey National: Fish and Fowl,' Economist, June 3, 1995, p. 69.
Ashworth, Herbert, The Building Society Story, London: Franey, 1980.
Barnes, Paul, 'A Shabbey Habit to Shake Off,' Accountancy, December 1989, pp. 25-26.
Bellman, Sir Harold, Bricks and Mortals: A Study of the Building Society Movement and the Story of the Abbey National Building Society, 1849-1949, London: Hutchinson, 1949.
Birch, Peter, 'Abbey National: A Continuous Process,' Banking World, December 1992, pp. 23-24.
Davidson, Andrew, 'Ian Harley,' June 1998, pp. 52-56.
Fry, John M., 'Abbey National Becomes a Company,' Long Range Planning, Vol. 23, no. 3, 1990, pp. 49-56.
Merrell, Caroline, 'Abbey Rejects `Inadequate' Lloyds Bid,' Times, February 8, 2001.
Price, Seymour J., Building Societies: Their Origins and History, London: Franey, 1958.
Reid, Margaret, 'Sir Christopher Tugendhat--All-Purpose Top Person,' Banking World, January 1992, pp. 16-18.
Ritchie, Berry, A Key to the Door: The Abbey National Story, London: Abbey National plc, 1990.
Source: International Directory of Company Histories, Vol. 39. St. James Press, 2001.