Credit crunch sends bank back to the drawing board

TIM SHARP    February 21 2008

Managers at Alliance & Leicester yesterday tore up their targets and pinned their hopes for growth on enticing customers to open current accounts after they unveiled a raft of losses linked to the credit crisis.

The company revealed it has to swallow an extra £150m in funding costs as the credit crunch continues to bite, a cost that could hit profitability.

It also announced a £185m write-down on assets linked to the credit markets. This contributed to a 30% drop in 2007 pre-tax profits to £399m with little sign of short-term improvement after the bank warned of a "challenging" outlook for the sector in 2008 and into 2009.

With the bank predicting its net interest margin, a key measurement of profitability, would come in at just 1% next year, investors sold out.

Even broker Panmure Gordon, which described it positively as the dented "Volvo of the UK banks" cut its price target. Alliance & Leicester shares fell 14% at one point before closing the day down 36p at 492p.

Funding has become a major issue for many banks, particularly those with large mortgage books, since Newcastle-based Northern Rock was forced to seek government help as markets tightened in the summer.

This sparked a run on customer deposits, and Alliance & Leicester finance director Chris Rhodes, acting chief executive in place of David Bennett who is on long-term sick leave, was adamant that state help was "not an option" for his institution due to the "stigma attached to it".
Instead, Alliance & Leicester has taken out £17bn of loans, most against its mortgage book in a process known as securitization, to ensure its funding into the first quarter of 2009.
It wants to use short-term financing, which has been in increasingly short supply, for only peripheral activities, cutting the proportion of its funding due to mature within 12 months to 33% compared to 45% a year ago.