More on Alliance and Leicester
Alliance & Leicester
Alliance & Leicester reported a 6% increase in operating profits to £556m but reported that the UK mortgage market had seen a significant slow down in the second half of the year. In the first half of 2004 total gross lending increased by over 17% compared to the same period in 2003, but in the second half of the year gross lending fell by 5% compared to the same period in 2003. An exceptional gain of £52m from the sale of the merchant acquisition business boosted pre tax profits to £608.3m (+16%)
Overall, the Alliance & Leicester’s mortgage business has grown, with gross mortgage lending increasing by 7% to £8.7bn, although market share has continued to slide and stands at 3%, down from the 3.3% reported at the third quarter and 3.8% at the half year stage. (Market share in 2003 was 2.9%). Mortgage lending contributed to 41% of full year profits.
Growth in personal lending (which made up 38% of profits) appears to have recovered in the fourth quarter. Gross advances (on unsecured personal loans) were £2.3bn were more than 20% higher than in 2003. The smaller (18% of first half profits) wholesale banking has performed well, with sales of cash to financial institutions (the provision of ATM and branch cash requirements for financial institutions) recording 24% growth. Gross corporate lending has grown £300m in the fourth quarter to £4.7bn.
Interest margins have deteriorated across all lines of business, falling 23% in mortgage lending (to 1.08%), 7% in personal banking (to 3.93%) and 16.4% in retail banking (to 1.57%). The bank reported a 3.9% decline in net interest income to £709.1m despite the growth in the loan book due to weaker margins. Non-interest income grew 8.8% to £691.5m due to higher mortgage-related fee income, higher unsecured personal loan fees and current account charges. Overall revenue growth was 2% and driven by non-interest income. Costs appear to be under control; the cost:income ratio improved to 53.7% (2003: 55.6%). The problem is with medium term growth, Alliance & Leicester’s main mortgage and personal lending markets are slowing and wholesale banking is still too Small to compensate.
Alliance & Leicester’s policy of avoiding lending in the buy to let, sub-prime, and income non-verified (including ‘fast track’) sectors of the market is conservative and should ensure a minimum of defaults in mortgage lending even if the housing amrket dips. Alliance & Leicester shares are trading at 890.5p on a prospective PE of 9.76x, in line with the sector and slightly below Royal Bank of Scotland which offers better prospects. The yield of 6% is above the sector average. HBOS, with comparable exposure to mortgages is trading on a similar PE multiple (although its yields are not as good) and offers greater stability.
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