A & L blames mortgage slump on windfall effect

Alliance & Leicester (A&L), the UK bank, pleased the City yesterday with a robust set of annual results. Underlying operating profit, which excludes non-recurring costs, rose 18 per cent to pounds 423m. The increase comes despite a slump in the A&L's share of net mortgage lending in the second half of the year.

"It was a good set of figures, better than anticipated", said Inigo Edsberg, analyst at Panmure Gordon.

Some in the City were disappointed that A&L, which converted from a building society to a bank last spring, did not follow in the Woolwich's footsteps and issue a special dividend.

However, Peter White, A&L's chief executive, raised hopes of a share buyback or a special dividend later in the year.

He stated the bank would first look to use its excess capital, which stands at around pounds 700m, to fund organic growth or to make suitable acquisitions. "If we cannot use capital effectively in this manner we will return it to shareholders", he said.

The A&L will ask its shareholders for the authority to buy back up to 10 per cent of its shares at its annual general meeting later this year.

Unlike many of its competitors, the bank has no intention of expanding overseas. Richard Pym, finance director, said: "We've no European adventures planned ... we've got so much to do in the UK".

Mr Pym said the most likely areas for acquisitions in the coming year were life assurance and unit trusts.

The dividend rose 28 per cent to 14.4p per share, netting a minimum payout of pounds 36 for those A&L investors who kept hold of their windfall shares. Yesterday the shares gained a further 18.5p to close at 965p.

The slump in the bank's net mortgage lending - which equals total (or gross) mortgage lending less mortgage repayments - in the second half of the year was attributed by Mr Pym to impact of conversion.

According to Mr Pym, A&L's share of net mortgage lending fell because customers were using their windfall payments to partially pay back their mortgages.

The bank's share of net mortgage lending fell from 2.3 per cent in 1997 to 1.5 per cent in 1996.

A number of the recently-converted building societies, such as the Woolwich, have reported similar slowdowns in net mortgage lending, and have claimed this was due to increases in mortgage repayments.

However, their competitors believe the slowdown reflects underlying uncompetitiveness, claiming the recently converted building societies have lost many customers in recent months.

These customers, it is said, were unwilling to change mortgage providers earlier in the year for fear of losing out on their free windfall shares.