Warning as Alliance & Leicester profits dive

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Mortgage bank Alliance & Leicester warned today of a "challenging" year ahead, as it reported a 29 per cent drop in 2007 operating profits following a £185 million hit from the credit crunch.

The group said funding would remain a priority and pledged it would keep a tight control on lending - a day after it emerged that A&L was one of a number of lenders to pull the plug on controversial 125-per-cent mortgages.

A&L reported core operating profits of £417 million for last year, down from £585 million in 2006.

The lender cautioned over slowing growth in the economy and housing market during 2008, although it forecast that average house prices would remain "broadly stable".

It said it had further strengthened its liquidity position since announcing new funding last month.

A&L is now funded until the first quarter of 2009.

But it revealed that the higher costs of securing liquidity amid the credit squeeze would knock net interest margins, expected to be just 1% over 2008.

The credit turmoil and collapse of America's sub-prime mortgage market has also wiped £185 million off the value of its investments - more than three times the £55 million it had estimated in November.

A&L is the latest bank to signal tougher times ahead for consumers seeking to borrow, as it stressed a continued "prudent" approach to lending.

High street banking giant Barclays yesterday said it would be "rigorous" over future lending.

A&L has already trimmed its maximum loan to value - the proportion of the value of the property that can be borrowed - from 95% to 90% since the crunch took hold last summer.

Its crackdown on higher risk lending has seen a drop in the number of borrowers defaulting on loans last year and bad debt charges.

Mortgage accounts over three months in arrears fell from 0.51% in 2006 to 0.49% in 2007, while arrears for unsecured loans fell from 5.6% to 5.5%.

Impairment charges meanwhile dropped by £12 million to £85 million.

However, the group revealed that the number of homes being repossessed almost doubled from 90 in 2006 to 171 last year.

Group finance director Chris Rhodes - who is acting as interim chief executive while boss David Bennett is on a temporary leave of absence due to illness - said: "Unprecedented conditions in the financial markets have had a significant effect on Alliance & Leicester's financial performance and priorities during the second half of 2007 and on our ability to deliver our strategic objectives in the short term."

He added: "Until there are clear signs of stability, funding will remain a priority for the group."

It plans to increase its customer deposit base to reduce reliance on wholesale money markets.

Customer deposits grew by £1.2 billion in 2007, but this is almost half the £2.1 billion leap in savings seen in 2006.