A&L shares crumble as credit crunch bites

Alliance & Leicester demonstrated the impact of the credit crunch today by admitting it was scaling back its mortgage lending by 10% or some £4.5bn.

Known for offering some of the most keenly priced home loans, A&L had warned in February that it expected to cut back its mortgage deals this year. Today, though, as it took a £400m credit crunch hit, the bank quantified the scale of the reduction to the surprise of analysts.

The bank's shares crumbled 10% to 458.75p as the extent of its credit crunch losses caused concern.

The bank also faced questioned from analysts about whether it would be able to maintain its dividend at last year's level of 55.3p a share. Chris Rhodes, back in his role of finance director after acting as chief executive until the start of this month, made it clear that no decision would be made about the interim dividend until the bank's July board meeting.

"I said [in February] that we were walking a tightrope between overall profitability and maintaining the dividend and we are still walking a tightrope," Rhodes said.

"It is too early to call the dividend one way or another until we have the half year numbers and some stability in treasury prices," he added.

David Bennett, who has returned to the chief executive seat after a period of illness, insisted core operating profit - excluding the treasury writedowns - was similar to the same period in 2007.

On a conference call with City analysts.....continued below

Advertisement starts

Advertisement ends

and investors, one of the bank's biggest shareholders urged the management not to follow rivals in axing dividends or paying in shares. The shareholder from M&G said: "Please resist the siren calls as best as you can."

The bank is planning to offer what it calls a voluntary scrip dividend - allowing shareholders to choose take their dividend in shares rather than cash - while rivals such as HBOS and RBS are planning to pay scrip dividends, forcing shareholders to take shares.

The total impact of the credit crunch in the first four months of the year was just under £400m although only £192m of that goes through the profit and loss account. Even so, analysts noted it was a hefty sum in comparison with the interim operating profit of £295m reported in 2007 and Rhodes refused to answer analysts questions about whether the bank would make a first half profit.

"We had assumed just £70m of writedowns and these moves are even more negative than the ones implied using RBS's apparently cautious marks," said Alex Potter, analyst at Collins Stewart.

The £192m writedown compares with £185m for the whole of 2007 while the £199m of fair value adjustments, which do not affect profits, compares with £147m last time.

One analyst on the conference call questioned whether the bank was effectively in "run off". Rhodes retorted that there was "not any question of the business being in run off".

He said the bank was being run on a "sensible view" of the UK economy. It is assuming house price falls of 5% in 2008 and 2009 and GDP of 1.7% in 2008 without any rise in unemployment.

guardian.co.uk © Guardian Newspapers Limited 2008