Alliance & Leicester: Trading statement

8:08 a.m. Tue 06 Dec 2005

Alliance & Leicester said that full year results for 2005 are likely to be ahead of market, despite shrinking margins. Full year net interest margins to be around 10 basis points lower than last year, a reflection of rising interest rates and a slowing market. The bank is funding a greater proportion of its lending with higher cost direct savings balances and wholesale funds while the slowing housing and retail market has precluded the bank from passing on increased costs to its lending clients.

The growth in profits is being driven by small increases in volumes and large reductions in operating costs.

Net mortgage lending has grown by £2.8bn while unsecured personal lending grew by 16%. On the whole, average interest earning assets for the first nine months of 2005 were around 6% ahead of the average for the whole of 2004.

There has been no apparent deterioration in asset quality and the tier 1 capital ratio, at 7% is only slightly below the recommended 8%.

Growth prospects are dependent on cost reductions and while this is acceptable in the short run we would prefer to see more top line growth. There are no immediate problems with solvency or significant deterioration in credit quality-as yet, although this could change as the business cycle worsens. Despite the fact that current year profits will exceed expectations, longer term growth is likely to lag the sector.

The share trades at 923.17p, on a prospective PE (2005 earnings) of 11.4x, in line with the sector with a yield of 5.5%.