Alliance plans acquisitions or share buy-backs

Alliance & Leicester, the former building society that floated as a bank in April, said it was on the lookout for acquisitions but promised shareholders it would buy back shares if it failed to find anything to buy at a sensible price. Maiden interim figures yesterday showed it is awash with surplus funds.

Passing its first test since joining the stock market, A&L beat market forecasts with first-half profits before tax of pounds 178m. That represented a fall of 3 per cent on last year's pounds 192m, but included a pounds 28m one-off hit for the costs of conversion and flotation.

Peter White, chief executive, said the results provided a firm base for the rest of the year, but he warned that strong competition in the personal financial services market was likely to intensify.

He added that the level at which interest rates peaked in the current cycle would be crucial in determining how strong the current recovery in the housing market became.

While the group confirmed it would prefer to invest its extra cash in acquisitions or organic growth, it ruled out a purchase overseas. Last week rival Woolwich said it foresaw problems making well-priced acquisitions in the UK and was considering "cherry-picking" in France, where valuations are lower.

Richard Pym, finance director, said the rationale behind any deals would either be to acquire an expanded customer base into which it could push its existing products or a company that would expand its fledgling interests in products such as unit trusts and life assurance.

Alliance & Leicester has focused on growing its unsecured lending business, which it believes is of better quality than those of its peers, and it would be keen to push that product through a broader customer base. During the half year, outstanding unsecured loans grew to pounds 1.03bn from pounds 833m. Gross advances during the half of pounds 464m represented a market share of 14.1 per cent.

Mr Pym refused to commit himself to a timetable for any share buy-back should those sorts of acquisitions not be possible, but he admitted that, with a capital ratio of almost twice the industry average, A&L was under some pressure to take some action.

Tier 1 capital, which is a measure of a bank's core capital compared to its total assets, stands at around 14 per cent at A&L, compared with an industry average of about 8 per cent and as low as 6.5 per cent in some cases. An acquisition would be one way of reducing the ratio, while handing cash back to shareholders through a special dividend or share buy-back is another.

Continued diversification increased profits from outside A&L's core mortgages and savings business to 38 per cent of the total. That was in spite of an increase in gross mortgage advances, which rose 53 per cent to pounds 1,422m in the six months to June, giving A&L a 4.5 per cent market share.

Profits were given a boost by a reduction in the ratio of costs to income, which slipped from 63.9 per cent to 61.6 per cent. Including the cost of conversion, earnings per share were 19.4 per cent (20.6p), representing a post-tax return on capital of 17.4 per cent.

The shares closed 8p higher on the day at 620.5p, against the trend of the market and the rest of the banking sector, as analysts focused on the potential for continued cost-cutting and cross-selling of products. The dividend was raised 18 per cent to 6.4p, around a third of the expected payout for the full year.

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