Better safe than sorry

13 May 2008 By George Hay Follow @gfhay

The small UK lender may have enough liquidity and be starting from a firmer capital base than peers. But Tuesday s 12% share price slump reflects fears of further writedowns. A&L needs to stop the rot by cutting the dividend, holding a rights issue, or both.

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Alliance & Leicester announced on May 13 it had written down £192m of subprime mortgage assets through its income statement. The UK's second smallest high street lender also added £199m in impairments to its reserves.

A&L still has £105.1m of collateralised debt obligations on its balance sheet, as well as £291.1m of CDOs held in an off balance sheet conduit.

After impairments announced in its 2007 results and on May 13, A&L has now written down the value of its structured investment vehicles (SIVs) from £400m to £93.8m.

A&L also announced it had extended its liquidity reserves from the first to the second quarter of 2009, and predicted UK house prices could fall 10% over the next two years.

In response, A&L shares fell 12% by midmorning, recovering slightly to 10.5% by midafternoon.

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