A&L profits evaporate in credit crunch

Alliance & Leicester today said the credit crunch turmoil had almost completely wiped out profits in the first six months of the year.

The bank, which has agreed a £1.26 billion sale to Abbey's Spanish banking parent Santander, reported interim pre-tax profits of £2 million, down from £290 million.

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A&L said it had been hit by losses on investments hurt by the credit crisis and soaring funding costs in crippled wholesale money markets.

A&L said the Santander takeover provided it with greater stability and certainty at a time of "significant external risks".

The bank said it took a £398 million knock from the credit squeeze in the first half.

But this was up just marginally on the figure reported in May and only £209 million of the hit affected the A&L's bottom line.

Underlying core operating profits - with credit crunch writedowns and funding costs stripped out - rose 2 per cent to £301 million, said A&L.

The group's mortgage business has slowed dramatically as it seeks to tighten lending criteria in the face of market troubles.

Its share of gross lending - all new business and advances - has more than halved to 1.6 per cent from 3.4 per cent in the first half of last year.

But net lending, which includes customers who are taking their home loans to other lenders, fell from a 4.2 per cent market share into negative territory as the bank lost more borrowers than it gained.

A&L's half-year bad debt charges rose to £62 million from £56 million in the same period last year.

Arrears levels for borrowers three months or more behind with repayments rose from 0.49 per cent of its mortgage book at the end of December to 0.61 per cent, while the number of homes repossessed rose from 89 this time last year to 120.

David Bennett, group chief executive, said A&L was taking prudent action and proving resilient to the market woes, but warned the problems in the sector may not ease for some time.

"There is a risk that the current economic and market turbulence could continue for a significant period of time and a risk of further uncertainty and contagion impacting the valuation of Alliance & Leicester," he said.

"Against this background, the proposal from Santander provides both greater stability and greater certainty in uncertain times."

Santander plans to merger its existing business Abbey with 959 UK branches and a share of more than 8 per cent of the savings and personal loans market.

It hopes to complete the deal later this year.