Risky business wipes £170m off Alliance & Leicester profits

Published on Wednesday 20 February 2008 09:16

ALLIANCE & Leicester, Britain's seventh-biggest bank, saw its pre-tax profit shrink around 30 per cent last year to £399 million, from £569m the year before.

The mortgage bank said profits were down on the back of a 185m writedown it booked to cover exposure to risky assets.

The set-aside was more than three times higher than the 55m estimate given late last year.

But it also took a 10m hit on ineffective hedges and a further 8m to cover redundancy costs.

A&L, which yesterday pulled the plug on its lending of controversial 125 per cent mortgages, also warned that it faced a "challenging" year over 2008.

It also noted that it would continue to take a "prudent" approach to future lending in response to current conditions in the lending markets.

Group finance director Chris Rhodes – who is currently standing in for chief executive David Bennett who is ill at the moment – said: "The trading outlook for financial services will be challenging in 2008, and we will maintain the prudent approach to lending which has led to our customer lending asset quality being better than industry averages."

At the core operating level, A&L said profit in the year to December 31 came in at 417m, down from 585m in 2006. However, before writedowns were taken account of, the bank said operating profit was up three per cent at 602m.

Analysts had been expecting the writedown after the bank announced three weeks ago that its exposure to structured investment vehicles (SIVs) and other products impacted by the US sub-prime housing crisis had more than tripled.

But the bank tried to calm fears about forward funding saying it had funding to see it through to the first quarter of 2009. However, it reported higher funding costs of 23m in the fourth quarter and warned that the increased cost of borrowing would hit its margins this year.

Nevertheless, A&L insisted that its customer facing business "remains in good shape, delivering good growth and excellent cost control".

A&L said that customer deposits – which lifted by 1.2 billion to 30.8bn –had provided the funding for 56 per cent of the loans that A&L granted in 2007 – an amount it expected to increase this year.

The bank also said that it saw 33,700 new business banking accounts opened last year – a rise of 36 per cent on the previous year.

Looking ahead, the bank said it planned to continue targeting growth in both personal and commercial current accounts, and in customer deposit balances.

But it cautioned that because of an emphasis on asset quality and revenues "we expect total new customer lending volumes to be lower than in recent years".

But Mr Rhodes added: "Our business is diversified and is not dependent on the performance of a single market."