Alliance & Leicester: Q1 2006 trading statement

8:35 a.m. Mon 12 Jun 2006

Alliance & Leicester reported an 11% growth in lending in the first three months to March 2006 but warned that interest margins had weakened. The weakening in margins was due to due to a lower mortgage and savings margin and a change in business mix towards lower margin assets.

In particular, the bank seems to have suffered in the highly profitable unsecured personal loan market. Gross advances to this market were £565m in the first quarter of 2006 compared to £890m last year. Unsecured loan balances have remained stable compared to the end of 2005 at £3.5bn.

Mortgage lending was strong with the bank reporting that gross lending in Q1 was £3.2bn (last year £1.5bn), a market share of 4.3% (last year 2.7%), and net lending was £1.4bn (last year £350m), a market share of 6.3% (last year 2%).

Revenues from other products (credit cards, long-term investments, life assurance and general insurance) in the first half of 2006 are expected to be similar to last year. Total costs in the first half are also expected to be similar to last year thanks to productivity improvements that have offset the costs of servicing increased business volumes.

Our concerns with this bank have not changed since we last looked at it. Although the news that costs have not increased is welcome, the bank’s cost:income ratio is still high (last reported at 55% compared to 45%-50% for more efficient players). Shrinking margins and an aggressive expansion in the mortgage portfolio, just as the housing market is slowing are also worries.

The share trades at 1176p, on a prospective PE (2007 earnings) of 13.7x, at the upper end of the sector range with a yield of 4.8%.