A&L profit warning sparks bid rumours

by Gill Montia

Story link: A&L profit warning sparks bid rumours

Alliance & Leicester (A&L), the UK mortgage bank, has issued a trading update in which it states that it will be taking a £55 million impairment charge on its Treasury investments and that the group’s other assets have fallen in value by £101 million.

The £55 million comprises a £40 million charge on the value of its structured investment vehicles and a further £15 million loss on the value of other traded securities, including highly structured securities, known as collateralised debt obligations.

As a result, operating profits in 2007 will be lower than forecast and the bank expects net interest margins (a reliable measure of banks’ profitability) to decrease during 2008, as the economy slows down and the UK mortgage market contracts.

Analysts’ estimates for A&L operating profit this year stand at around £598 million.

David Bennett, A&L’s recently appointed chief executive, has assured investors that the bank has funding measures in place to enable it to meet its obligations in the wholesale debt markets.

No liquidity crisis should occur because A&L is now “pre-funded” into the third quarter of 2008.

Other details released at the briefing include lending of £9.8 billion to homebuyers during the first nine months of the year, including £290 million of buy-to-let lending.

The bank estimates that its share of the UK mortgage market is around 3.6% and has confirmed that customer deposits stood at £23.4 billion at the end of October.

Despite the gloomy nature of the update, which was unscheduled, A&L shares rose on rumours that Spain’s Banco Santander is considering an approach.