Shares digital

Alliance & Leicester (AL.) – Finals PTP: £399.2m (£568.9m) Divi: 55.3p (52.3p)

The share price had been propped up in recent months by rumours of a bid from Santander, but the Spanish bank has since distanced itself from any deal and this set of results raises some serious concerns for the lender.

While pre-tax profits were down from £569 million in 2006 to £399 million in 2007 they were actually only just shy of market expectations. More troubling is the outlook statement that accompanies the numbers. Describing the trading environment as ‘challenging’ for the year ahead it effectively amounts to a profits warning with dividends expected to remain flat, buybacks halted, and increased funding costs and lower lending volumes leading to a sharp drop in revenues. Finance director Chris Rhodes, who is acting chief executive, says: ‘Until there are clear signs of stability, funding will remain a priority for the group,’ and although management probably deserves some credit for taking their medicine now it all adds up to a fairly depressing picture. In response the stock was down by as much as 19% at one stage – although it clawed back some of that ground to settle at around the 488p mark.

Broker Collins Stewart describes the update as the ‘worst of all worlds’ and reiterates its ‘sell’ recommendation. The company hopes may now rest on the emergence of a white knight bidder, especially if the stock continues to fall, but analyst Alex Potter is sceptical, he says: ‘We would avoid this situation and do not foresee this somewhat marginal franchise being a strategic UK entry point for an overseas bidder in the short term.’

Shares says: Making funding the priority is a sensible move but a significant downturn in the housing market would only add to the bank’s woes.

by: Tom Sieber