A&L pledges to give pounds 900m surplus capital to investors

ALLIANCE & LEICESTER shrugged off the City's disappointment over the recent collapse of merger talks with Bank of Ireland when its shares soared 1.5 per cent yesterday after it pledged to return all its pounds 900m surplus capital to shareholders within the next three years.

Peter White, the chief executive, said that while the building society turned bank had not given up its search for merger partners, it would be focussing on driving down costs and using capital more efficiently. This year A&L is planning to buy back pounds 300m worth of shares.

"We will use our surplus capital to maximise returns for shareholders and will consider value-enhancing mergers or acquisitions, providing there is a strong business case which can be delivered," said Mr White.

The change in emphasis was welcomed in the City where A&L's shares jumped 12p to 834p. The stock has been the fourth worst performer in the sector this year despite regular forays into the market by its broker to prop up the price through selective buying of shares.

Analysts were also encouraged by the group's half-year results, which showed the effects of cost cutting already coming through. Profits before tax for the half year were up 7 per cent to pounds 247m ahead of consensus forecasts, leading some brokers to upgrade predictions for the full year from around pounds 480m to pounds 500m or more.

Although margins were down - reflecting the pressure on both savings and lending from new entrants such as Standard Life and Prudential's Egg accounts - the impact was less marked than at Northern Rock, which lost pounds 600m of deposits in the past five months.

Deposit balances were up from pounds 19.9bn in December to pounds 20.5bn although the bank's share of net new mortgage lending was eroded slightly from 5.5 per cent to 5 per cent. Administration costs were down 9 per cent to pounds 311m.

Hugh Pye, an analyst at Robert Fleming who was among those upgrading forecasts yesterday, said: "It is good to see costs falling and retail deposits have gone up a bit rather than down."

The bank has also been working to expand its higher margin unsecured personal lending and credit card businesses, which account for 47 per cent of profits.

Since the collapse of attempts to merge with Bank of Ireland in June, the City has been rife with rumours that A&L could full prey to a takeover by a high street bank, despite the five -year takeover protection the bank received when it converted.

However, more sober voices remain sceptical, arguing that A&L is too small a business to justify a major player paying a big take-out premium.