LONDON (Reuters) - British bank Alliance & Leicester suffered a double blow from global financial market turmoil on Wednesday, warning a big rise in funding costs would dent 2008 profit after a writedown on risky assets hit 2007.
By Steve Slater
LONDON (Reuters) - British bank Alliance & Leicester suffered a double blow from global financial market turmoil on Wednesday, warning a big rise in funding costs would dent 2008 profit after a writedown on risky assets hit 2007.
A&L, Britain's seventh-biggest listed bank, surprised investors by estimating funding costs will be about 150 million pounds ($292 million) higher this year than under normal circumstances as it takes precautions to avoid the crisis that hit rival Northern Rock last year.
The news, alongside a 30 percent drop in 2007 profits, a gloomy outlook into 2009 and a lower-than-expected dividend, sent the bank's shares down over 18 percent to a record low.
!ADVERTISEMENT!A&L suffered a 185 million pound ($360.4 million) writedown on its exposure to assets that have been tarnished by the U.S. sub-prime housing crisis -- in line with guidance three weeks ago. That cut its 2007 pretax profit to 399 million, below an average forecast of 416 million, according to Reuters Estimates.
The bank reported higher funding costs of 23 million pounds in the fourth quarter and said costs will remain high this year as it had "taken prudent measures" to increase its level of liquidity and the maturity of its wholesale funding, due to the risks of short-term balance sheet financing.
"That's come at a cost, but we feel it's the right thing to do to pay the price for security," said Chris Rhodes, the finance director who is also standing in as chief executive. "We're now talking about a very strong funding position that takes us into Q1 2009."
The costs depressed A&L's net interest margin to 0.93 percent in the fourth quarter. It now expects the margin to be about 1 percent this year, down from previous guidance of near 1.07 percent and 1.16 percent in 2007 and 1.3 percent in 2006.
"We do not think this will be the end of the story and think the wholesale markets are unlikely to function at economic levels for UK mortgage banks in the medium term," JP Morgan analysts said in a research note.
At 1150 GMT A&L shares were down 9.7 percent at 476.8 pence, the biggest UK blue-chip faller, cutting the bank's value to 2 billion pounds. Shares earlier sagged as low as 428p, their lowest level since the former building society floated in 1997.
The extent of the higher funding costs hurt other UK banks, notably HBOS, whose shares dipped 2.7 percent.
DIVIDEND DISAPPOINTMENT
A&L also disappointed investors by holding its final dividend flat -- meaning a rise of just 2.2 percent for its full-year dividend to 55.3 pence per share -- and warning it did not expect a rise in 2008. Analysts said it could be the only UK bank not to promise a higher payout.
Rhodes said the dividend cover needs to recover to at least 1.5 times earnings -- from 1.07 in 2007 and an expected 1.1 to 1.2 times for 2008 -- before it can raise the payout.
"We need to get back to 1.5 to 1.7 before (we) consider increasing the dividend again," he told analysts, adding a "material deviation" from current profit guidance could instead force the bank to cut the promised payout.
"The outlook reads poorly, with volumes down, costs rising, margin guidance slashed, the earnings target cut and the dividend guided flat in 2008 ... the outlook is miserable, with significant earnings cuts likely," said James Hutson, analyst at Keefe, Bruyette & Woods. "The only positive may be a white knight (bidder) if the stock falls enough."
A&L shares had already more than halved since May, hit by a relatively high exposure to risky assets for its size, an expected rise in funding costs and modest growth prospects as the UK housing market and economy cool.
The bank calmed worries about funding problems in November as it put in place medium-term deals, which included a 4 billion pound two-year facility with Credit Suisse.
A&L warned last month that its writedown on holdings of structured investment vehicles (SIVs) and other complex products related to U.S. subprime housing had more than tripled from a previous estimate to 185 million pounds. Analysts at Exane BNP said they estimated a further 40 million hit in 2008.
Profit was also knocked by a 10 million pound loss on ineffective hedges and 8 million pounds of redundancy costs.
(Additional reporting by Clara Ferreira-Marques; Editing by Louise Ireland and Erica Billingham)
