Alliance & Leicester to shrink its mortgage loan book by £4.5bn

Written by Editorial Team

14 May 2008 / by Daniela Gieseler

Alliance & Leicester is feeling the impact of the credit crunch strongly, admitting to nearly £400m additional writedowns in a trading report yesterday and pulling more capital out of the UK’s already undersupplied mortgage market.

The lender confirmed that it had reduced its mortgage lending by £1.5bn to £42.7bn in the first four months of the year, and is planning to cut down £4.5bn for the year as a whole, which constitutes 10 per cent of its mortgage balances.

The bank’s business plan is based on its ‘consensus projection’ that house prices will fall by 5 per cent in 2008 and 2009, with no significant increase in unemployment and annual economical growth of around 1.7 per cent.

However, A&L; finance director Chris Rhodes admitted that this outlook might be too optimistic: “We don’t see upside to that, we see downside. We are planning for the consensus, but the risk is to the downside.”

Yesterdays report caused A&L;’s shares to plummet by 10 per cent down to 458 ¾ p and sparked fresh concerns if the dividend would be safe for this year as the bank refused to comment on this issue.

“I said we were walking a tightrope between overall profitability and maintaining the dividend and we are still walking a tightrope,” Mr 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.”

The bank is planning to give shareholders the option to take their dividend in shares rather than cash.

The total losses caused by the credit crunch in the first half of the year amounts to £391m and could wipe out the profits. Half of the losses, £192m, are exotic assets which will be included in the profit and loss account. Another £199m of the writedowns were made on the value of other assets, and a further £49m funding and liquidity costs have arisen on top of that.

The £192m writedown compares with £185m for the whole of last year, while last year’s fair value adjustments, which do not affect profits, were only £147m opposed to the £199m this year.

The losses surpassed analysts’ expectations by far, as Alex Potter from Collins Stewart stressed: “We had assumed just £70m of writedowns and these moves are even more negative than the ones implied using RBS’s apparently cautious markdowns.”

While Mr Rhodes was adamant that the core capital base is sound, that its obligations are covered into next year and that it has around £6bn cash at hand, he would not rule out a rights issue after the new losses.

© Fair Investment Company Ltd