UK mortgage lender Alliance & Leicester today warned that higher funding costs will dent 2008 margins as it reported an expected 29 per cent slump in 2007 core operating profit, held back by large scale write downs against its debt-backed investments in the wake of the global credit squeeze, sending its shares 12 per cent lower.
The group, which held abortive talks with Spain's Banco Santander last year, said it has further strengthened its funding position into the first quarter of 2009. However, this has come at a cost to margins.
A&L is forecasting an overall group margin for 2008 of 1 per cent compared with 1.16 per cent for the whole of 2007.
"Over time it's going to increase to that 1 per cent from the 0.93 per cent that we experienced in the final quarter of 2007," finance director Chris Rhodes said.
Rhodes, the acting chief executive while David Bennett recovers from illness, said the impact on 2008 profit will be 16 basis points 'off roughly £70 billion of interest earning assets'.
A&L forecast it 2008 net interest income will be around £150 million lower than would have been the case if market conditions were similar to those in the first half of 2007.
Mr Rhodes explained there are two aspects to the projected shortfall. The majority relates to the additional cost of the medium term strategic funding the bank has raised in response to the credit crunch and the balance relates to the cost of holding liquidity.
"We're holding just over £6 billion of liquidity at the moment compared to £3 billion in normal times. Effectively, we put that away into the overnight money markets but it's costing us three months Libor (London Interbank Offered Rate) to fund it."
For the year to December 31st, 2007 A&L made a core operating profit of £417 million, down from £585 million in the previous year - an outcome in line with guidance given by the company last month.