Smarter investors dump Alliance & Leicester

Alliance & Leicester revealed a 30% drop in profits this morning, wiping £300m off its share price...

Last Updated: 31 Aug 2010

The UK lender said today that 2007 pre-tax profits slumped to £399m, about 30% lower than 2006, thanks largely to losses of £185m on dodgy sub-prime investment vehicles. It also said that margins would be hit this year because of higher funding costs (making it more expensive to borrow money) – and that’s not to mention the potential competitive threat it faces from the newly-government-backed Northern Rock.

Sure enough, the bank that once boasted that it was home to the ‘smarter investor’ promptly saw an investor exodus – even though it raised its dividend. Its share price opened at 440p, down 17% from yesterday’s close, and sunk as low as 428p before rebounding to around 460p. That means it’s lost about £300m in value this morning – which is not ideal given that it’s already halved in value in the last six months.

Much of this slump has been due to the slow and lingering decline of Northern Rock of course, as the market has tarred A&L with the same brush – and it’s quite possible that the recently-nationalised lender could inflict more pain on A&L before the year is out. With the Chancellor determined to let the Rock compete against rival banks in order to prevent its value plunging even further, rivals like A&L and Bradford & Bingley are sweating over the possibility of the National Rock being able to offer better saving and mortgage deals to consumers – all effectively backed by the Bank of England.

There was some good news from A&L today – profits in its retail banking rose 1.5% to £462m (probably thanks partly to deserting customers from the Rock). The arrears on its mortgage book – already below the industry average – fell still further. And unlike the Rock, it’s not so reliant on the wholesale money markets for its funding – actual real money from customers funded 56% of its loans last year, and it expects this proportion to increase in 2008.

But in a sector that’s facing a gloomy year, A&L is likely to feel the pain more than most. So it’s no surprise that the smarter investor is now anywhere but Alliance & Leicester…

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