Alliance & Leicester hit by rise in bad debts as profits fall £15m

Profits at Alliance & Leicester fell in the first half of this year after bad debts jumped and margins were squeezed.

At £257m, profits before tax were £15m down on the same period last year as bad debts grew by £18m to £48m.

Steeper mortgage repayments and higher utility bills left more A&L customers struggling to service debts, particularly on unsecured personal loans taken out in 2004 and early 2005.

The bank's chief executive, Richard Pym, reassured shareholders that he believed defaults were peaking and should be no higher in the second half of the year than the first.

Tighter lending criteria in response to worries about defaults also hit the profitability of personal loans, traditionally among the most lucrative products for A&L. Gross personal lending fell £360m to £1.1bn.

Aggressive pricing of savings accounts and mortgages in a bid to win business further hit margins - the difference between the rates of interest it charges borrowers and pays savers.

Ian Gordon, a banking analyst at Dresdner Kleinwort, said: "They are, and will remain, a slow or, in this case, no-growth company. They will probably beat market expectations over the next couple of years but investors can buy better banks for less elsewhere in the sector."

He values the shares at just 950p stripped of any bid premium. However, A&L's profits were actually better than expected and the shares rose 19 to 1,063p, valuing the bank at almost £4.8bn.

The bank's share of the mortgage market grew to about 5.3 per cent, comfortably ahead of its traditional 3.5 per cent. Gross mortgage lending rose to £6.4bn in the first half of the year, against £4.1bn in the same time last year. The cost of running the business was reduced by £6m, but A&L made redundancy payments totalling £14m. A dozen branches were refurbished, with a further 45 slated for a makeover.

The lacklustre results were seen by some industry observers as diminishing the likelihood of A&L attracting a bid. Analysts at Keefe Bruyette & Woods told clients: "We see little in these numbers to encourage buyers and not enough to encourage management to initiate a sale."

A&L has long been touted as a likely bid target. Crédit Agricole, France's biggest lender, said it was no longer interested earlier this month.

The other name frequently linked with A&L is Banco Santander, the Spanish owner of the UK mortgage bank Abbey. However, Emilio Botin, Santander's chairman, has signalled to shareholders that he is not interested in another mortgage bank.