A&L posts £2m profits and explains reasons for sale to Santander

Alliance & Leicester's chief executive, David Bennett, said yesterday that the bank's sale to Santander of Spain was driven by fear of future shocks, as the credit crunch wiped out almost all of A&L's first-half profit.

The bank's operating profit rose by 2 per cent to £301m but £279m of losses, writedowns and extra costs from the financial turmoil drove the pre-tax figure down to just £2m.

At the end of June, A&L's mortgage and unsecured personal loan arrears were less than half the industry average, while the proportion of commercial loans in arrears fell from the end of December. Analysts asked Mr Bennett why, with the bank's core business holding up, the board had decided two weeks ago to sell to Spain's biggest bank.

Mr Bennett, who became chief executive just before the financial crisis started, said: "We have seen a series of shocks in the last few months [that] have generated adverse sentiment towards banks like A&L and particularly to banks of our size. We can see potential shocks happening. One of the issues is the sheer uncertainty... Over the last year or so we have seen effects on both [A&L's] funding and equity valuation." He added that the bank was also worried about the economy. The bank lost or wrote down £209m on investments in debt products that have been hammered by the credit crunch. It also had to spend an extra £79m for bank funding and the increased cost of liquidity.

Bad debts rose 11 per cent to £62.2m, with mortgage impairments coming in at £7m from zero a year earlier. The bank said £3m of the mortgage charge was related to fraud or negligence by solicitors and mortgage brokers in making mortgage applications.

Chris Rhodes, the finance dir-ector, said the incidents occurred in three or four regions of the country in 2006 and that A&L had since tightened its checks.

Santander swooped on A&L to hammer out a takeover over a weekend. The deal is currently valued at £1.4bn, or 335p a share. A&L's shares closed little changed at 340.25p.