A&L sees annual profits drop 30%

A&L said market conditions were "unprecedented" See A&L's share price

UK bank Alliance & Leicester has reported a 30% drop in annual profits following market turbulence and has predicted a challenging year ahead.

Pre-tax profits were £399m in 2007, down from £569m a year earlier, after the bank wrote down the value of its exposure to risky assets by £185m.

A&L also said its funding costs were set to be £150m higher than normal this year because of credit market problems.

The gloomy news sent its shares to the lowest level since they began trading.

A&L shares were recently trading 50.25 pence, or 9.5%, lower at 477.75p, though they fell as low as 428p.

"Profits have come in at the lower end of already significantly reduced expectations and still elevated funding conditions in the wholesale markets will surely be pressurising profit margins going forward," said Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers.

'Unprecedented conditions'

A&L's group finance director Chris Rhodes said: "The trading outlook for financial services will be challenging in 2008, and we will maintain the prudent approach to lending which has led to our customer lending asset quality being better than industry averages."

He added that the firm was diversified and "not dependent on the performance of a single market", with 27% of group revenues coming from mortgages and savings.

A&L has been one of the many banks to be affected by the slowdown in the US housing sector which has triggered a rise in sub-prime mortgage defaults.

The bank had already announced three weeks ago that the write-down stemming from its exposure to the US sub-prime crisis would be £185m, three times larger than its previous estimate.

Following "unprecedented conditions" in the markets since August 2007, the bank said its previous target for annual earnings per share of 9% above inflation was "no longer appropriate".

Analysts are watching closely as banks report their earnings, to gauge whether recent problems in financial markets are coming to an end, and to judge what the outlook is for 2008.

On Tuesday, Barclays reported annual profits of £7.08bn for 2007, 1% lower than in 2006, but in line with expectations. Last week, Bradford & Bingley said its annual profits had almost halved to £126m.