Alliance & Leicester warns on rising bad debt charges

Alliance & Leicester warned yesterday that its bad debt charges were rising faster than assets as it forecast flat first-half revenues.

Alliance & Leicester warned yesterday that its bad debt charges were rising faster than assets as it forecast flat first-half revenues.

The bank said in a trading update that it expected group revenues in the first half of this year to be "broadly similar" to last year.

It sought to reassure investors by stressing that asset quality across all its businesses remains strong. It is setting aside £30m to cover bad bad debts within retail banking in the first half, up from £18m a year ago, reflecting the strong growth in personal loans. Personal loan gross advances rose to £890m in the first quarter, from £587m last year.

The bank said the proportion of personal loan balances in arrears was stable at the end of May, compared with 4.2 per cent in December. Jonathan Pierce, at CSFB, said: "A&L is a bank with hardly any revenue growth and on our forecasts falling profits. It has scraped the barrel to achieve revenue targets over the last two years."

He added: "There are big question marks over the bad debt charge as well. Retail asset quality clearly isn't as strong as it was if the charge is rising at double the rate of loan growth."

The bank's net interest margin - a measure of the profitability of loans and deposits - has continued to fall as margins on unsecured loans and mortgages tightened. That has forced the bank to keep a tight lid on costs, which rose about 3 per cent in the first quarter - better than some analysts had expected.

Mortgage lending has recovered somewhat from last year's poor fourth quarter when net lending registered an outflow of £300m. In the first quarter of this year, net mortgage lending recovered to £350m, giving the bank a market share of 2 per cent, while gross lending totalled £1.5bn. Both were still down from a year ago when net lending amounted to £1.1bn, with a market share of 4.5 per cent, while gross lending was £2.5bn.

One problem for A&L is that the market has continued to be dominated by remortgaging, which accounted for more than half of new mortgage lending in the first three months of this year. That means the bank is losing out on sales of mortgage-related products such as household insurance and life assurance. Sales of those products fell in the first quarter from a year ago.

Meanwhile, Cattles, the doorstep lender, admitted that trading had become more challenging during the second quarter and was likely to remain tough, but added that bad debts were stable.