Alliance & Leicester: a smarter investor?

Alliance & Leicester issued a profit warning this morning and admitted losing millions of pounds on sub-prime mortgage investments – so naturally, its share price jumped 14%. The markets are so jittery at the moment that it's seen as good news when your losses are not quite as huge as they might have been...

Last Updated: 31 Aug 2010

In a surprise trading update today, Alliance & Leicester said it’s had to write off £55m from the value of its structured investment vehicles, while the value of its debt funds has dropped by more than £100m. As a result, its operating profit for the year would come in below analysts’ expectations.

All this might sound like bad news, but the positive angle for investors was that at least the losses weren’t any worse. Rumours have been dogging A&L for weeks that its finances were in almost as bad a state as rival Northern Rock, because it operates a similar business model (and because it hadn’t scheduled a trading update). So a £55m loss is relatively small potatoes – hence the share price bounce.

A&L also has the advantage that it has been regularly touted as a bid target – Credit Agricole last year and Banco Santander this year, according to reports – which always help to prop up your share price.

The mortgage bank was also at pains to stress that there was no chance of it running out of money. ‘We have now pre-funded our maturing medium term funding… into the third quarter of 2008,’ A&L said today – which presumably means they’ve tied up a deal with a bank to keep the cash on tap. But it’s learned its lesson from the Rock – in 2008 it expects to fund growth by taking more deposits from its customers, rather than raising it on the money markets.

Rival Bradford & Bingley, another victim of the rumour-mongers, also put out a reassuring statement today suggesting it was on track to hit profit forecasts despite a fall in value of its mortgage-related investments. It was even relatively bullish about the housing market; no doubt partly a case of ‘talking its book’ (i.e. bigging up its own investments), but reassuring nonetheless – particularly after Nationwide put out figures today saying that house prices dropped again last month.

Nerves are clearly jangling at the moment, after the Rock fiasco. Managing the rumour mill is difficult enough at the best of times – at the moment banking CEOs must feel as though they spend more time dealing with rumours than they do running their business...

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