Market Report: Alliance & Leicester tumbles over capital fears

Alliance & Leicester was weak yesterday after Panmure Gordon, mindful of the "unenviable combination of operating losses and declining credit quality/rising risk weightings", highlighted the need for additional capital at the FTSE 250-listed bank.

The broker slashed its target price for the stock to 180p from 450 and said: "We expect A&L's tier-1 capital ratio will weaken from 9.4 per cent in 2007 to 7.7 per cent by end-2008 and 6.3 per cent by end-2009."

"If we use a minimum 8 per cent tier-1 ratio, this would imply a tier 1 capital shortfall of circa £420m by end-2009. A conservative target [of a] 10 per cent tier- 1 ratio would imply a £1bn shortfall."

Panmure forecasts a 22.9p-per-share loss for 2008. The broker also expects the bank to cut its dividend by 60 per cent to 22p.

The assessment bore on the stock, which was down 13.58 per cent or 33.75p at 214.75p.

In the wider sector, Bradford & Bingley was the worst off. The stock continued to trade below the bank's 55p per share rights issue offer price, down 19.05 per cent or 8p at 34p.

HBOS was down 4.5p at 270.75p, below its 275p per share rights issue offer price, and the Royal Bank of Scotland was weaker by 6.1p at 194.9p.

The FTSE 100 briefly re-entered bear market territory in the morning, slipping 154 points to 5,358.7, before bouncing back to 5,440.5 by the close, down 72.2, or 1.3 per cent.

The FTSE 250 shed 142.9 points, or 1.7 per cent, to 8,480.1.

On the FTSE 100, Marks & Spencer climbed by 6.68 per cent or 14.5p to 231.5p and claimed first place on the leaderboard following rumours of renewed bid interest from Sir Philip Green, the retail billionaire.

Market talk also mooted the possibility of a tie-up with J Sainsbury, which was up 0.75p at 288.75p, and interest from private equity firms.

Traders, however, remained sceptical and attributed the bounce to the recent weakness in the stock.

The remainder of the retail sector also recovered and Kingfisher was up 2.8p at 101.1p, at fourth place on the index. Next was up 17p at 873p.

At the other end of the index, the Eurasian Natural Resources Corporation lost 75p to 1030p as metals prices retreated.

Investor concern that the bleak economic outlook may hamper industrial consumption also weighed on the sector and Antofagasta was down more than 35.5p at 574p.

Vedanta Resources lost 106p to 1916p, Lonmin was down 117p at 2717p and Anglo American was weaker by 154p at 3004p.

Elsewhere, the oil price eased for the second day in a row and Cairn Energy, the India-focused oil & gas exploration and production group, lost 190p to 2796p.

Tullow Oil was down 47p at 873p and BP lost 19.5p to 552.5p.

Transport stocks, on the other hand, registered gains and British Airways, at second place on the FTSE 100, was up 11.25p at 217.25p.

Cruise operator Carnival gained 42p to 1614p and FirstGroup, the bus and rail operator which led the index on Monday, rose by another 6p to 542.5p.

On the FTSE 250, Persimmon rose by 7.75p to 235.75p despite highlighting tougher housing market conditions and announcing 1,000 job cuts in its trading statement.

Panmure Gordon said the group's performance on units and selling prices was within its expectations, while the comments on debt were better than it anticipated. "The performance on margin and outlook in the second half is worse than our expectations," the broker said, reducing its target price for the stock to 225p from 250p.

Barratt Developments, which is due to publish an update tomorrow, was down 1.5p at 39p and Redrow, which is expected to update the market today, lost 2p to 96.25p.

Also on the FTSE 250, Punch Taverns was down almost 7 per cent or 19.5p at 260.25p after Cazenove downgraded the stock to "in-line" from "outperform" following a presentation on financing.

"Punch is clearly seeking to reassure the market that its balance sheet structure is sustainable. It reiterated it has no refinancing needs before 2010 and that it has a minimum of 17 per cent EBITDA [earnings before interest, tax, deprecation and amortisation] headroom on its debt service coverage ratio covenants," the broker said.

"The problem is that with a like-for-like decline in EBITDA of 5.9 per cent for the leased estate in the third quarter, we believe the market is likely to await firm evidence of improved momentum before re-rating the shares."

On AIM, drug and alcohol testing company Concateno gained more than 21 per cent or 28.50p to 163.75p after confirming that it had received a number of bid approaches. The company has drafted UBS to act as financial adviser while it considers its options.