A&L shocks the markets with £185m write down
Thursday 21 February 2008
Alliance & Leicester admitted regret about its investments in risky assets yesterday as it scrapped its profit target and said it would not compete strongly for new mortgage customers this year.
The bank's shares fell nearly 7 per cent to their lowest since 2000 after it said £150m of extra funding costs would squeeze margins this year. At one point the shares were down 19 per cent at an all-time low.
The former building society wrote down £185m of structured-credit assets held in its treasury operation, causing full-year profit to fall 30 per cent to £399m.
Richard Banks, who heads A&L's treasury business, said: "I regret it [the investments] because we have a loss to the P&L of £185m and that has got to be regrettable." He said when the investments were made in 1999 the entire industry had assumed that there would always be a market for the assets.
Chris Rhodes, the finance director and acting chief executive, said the treasury would now be "a banker, not a profit centre" for A&L. He said banks had been too complacent about risk and had not planned for a combination of shocks hitting the industry at the same time.
Fears about lack of funding hit A&L's shares last year after Northern Rock was unable to meet its liabilities. A&L eased concerns in November and now has finance from other banks in place into next year. But the increased cost of that funding will cause the net interest margin to shrink to about 1 per cent from 1.16 per cent last year.
With margins and lending shrinking, the bank yesterday axed its target of growing earnings per share by at least 9 percentage points above inflation. The bank froze its second-half dividend and said it intended to hold the annual payout at 55.3p this year.
Mr Rhodes said A&L would not compete strongly for new mortgage business this year. It will instead try to retain about 70 per cent of 100,000 existing customers coming up for new deals because they are more profitable and safer. "We expect mortgage lending to go backwards in 2008. You are not paying distribution fees [to brokers] and you are getting a known customer with a track record," he said.
A&L will also stay out of the fierce war for savings customers if they are not profitable. The bank added £1.2bn of deposits last year but almost all of that was in the first half, before the run on Northern Rock freed billions of pounds of savings that have flowed to other banks.
Mr Rhodes said the lack of inflows in the second half was not because savers were staying away from A&L but because it did not offer unprofitable rates. With wholesale markets almost dead and loan growth slowing, banks are competing for retail funding but Mr Rhodes said he would sooner use more reliable loans from banks than pay sky-high retail rates. The bank will compete hard for current accounts, which are the key to selling other products, Mr Rhodes said. The bank's shares closed at 492p.
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