Certainly the Internet banking arm,
, is proving to be an extremely exciting addition to the business of its owner, the U.K. insurer
. However, it's still a little too early to start putting the Egg before the chicken.
Even the management of the U.K.'s largest insurer would probably admit to being taken a bit by surprise by the success of Egg. Coupled with the recent interest in other Internet companies in the U.K., that success has inevitably led to talk of a separate listing for Egg. Prudential says it has no immediate plans for such a move -- but it would say that.
At the end of July, Prudential reported pretax profit was down 26% to 369 million pounds ($593.6 million) for the first six months of 1999. This type of earnings result looks a whole lot like a company in transition, with profits depressed by spending on new parts of the business.
Prudential Eggs On Egg
A lot of the money is being spent on Egg, for which there was a development charge of 69 million pounds during the period. Prudential says it may spend 150 million on Egg this year. If the losses in Egg and a 55-million-pound restructuring charge are stripped out, Prudential's underlying profits during the first half were actually up 8%.
Is the money on Egg being well spent? Probably yes. At the end of June, 10 months after its launch, Egg had garnered 6.7 billion pounds in deposits from 550,000 customers. The number of new customers grew in May and June by 17,000, even after Egg decided that it would no longer take applications over the phone, only via the Internet.
The biggest selling point of Egg is its guarantee that interest rates for most of its accounts will be 50 basis points above the base lending rates, with another 0.25% on top for Internet users of its service. This high rate is especially appealing to savers in the current low interest-rate environment.
Prudential originally figured that it could maintain such a high rate because of its low operating costs. However, the sheer success of Egg proved such that this guarantee became too expensive a luxury. Of the 69 million pounds Prudential spent on Egg in the first half of this year, 14 million pounds of that went on this guarantee.
Prudential has, therefore, decided to scrap this guarantee from January 2000, and instead pledge that it won't pay savers less than 0.5% below the base rate.
Will Prudential End Up With Egg on its Face?
With the guarantee gone, some have argued that Egg will crack. Yet Prudential is banking on keeping its customers by offering more value-added financial products to make up for the loss of the artificially high savings rate.
The cross-selling of products sounds great in practice but the success of it hasn't been particularly in evidence in traditional banking and there isn't any reason to believe that Internet banking would be any different.
However, Egg customers may be more interested in buying more financial products than traditional banking customers. The average Egg account is a worth a hefty 17,000 pounds and 60% of clients already own shares or mutual funds. Therefore, plans by Egg to introduce an electronic credit card and a unit trust supermarket with an online share-dealing service may actually appeal to its customers.
And then there is the brand. "The unusual brand name and being early in the market is very important ... This is true for e-commerce as well financial services," says Jay Marathe, head of consulting at the U.K. research-led investment group
All these uncertainties make for wildly different valuations for Egg of between 1 billion and 3.6 billion pounds, but there is probably more there for investors to get excited about than with
. The subscription-free ISP recently floated and has a market capitalization of over 1 billion pounds.
U.S. investors are due to get a chance to look more closely at Prudential in 2000, when it applies for a listing on the
. The insurer says it will drop the "corporation" in its name and become just Prudential PLC so it won't be confused with the similarly named U.S insurance firm.
By that time we may know more about whether Egg is all its cracked up to be.