Ahead of its annual results on February 20, A&L said it will report a full-year "core operating profit" of £598m excluding impairment charges. That underlying figure was broadly in line with market expectations.
But the bank will also book £155m of writedowns on the value of structured-investment vehicles (SIVs), and a further £30m for credit-related assets including collateralized debt obligations. The company had said in November that it expected to book writedowns of £55m after the first ten months of 2007.
A&L reassured that was reducing its reliance on wholesale funding and had taken a new credit facility to cover its maturing medium-term wholesale funding to the end of this year, without giving details of the cost. Two months ago the group arranged a £4bn, two-year financing facility with Credit Suisse which meant it was fully funded up to the third quarter.
However, there was a further hit to reserves, with treasury exposures increased to £210m from £101m in November. According to analysis from Morgan Stanley, losses reduce A&L's Tier 1 capital by 5% for 2007.
Morgan Stanley analysts highlighted that the net book value of A&L's SIV investments are still £210m, compared with a net asset value of £180mn. "We expect further write-downs to the investments over the course of 2008, but acknowledge that the impairments now appear more prudent than before," they told clients in a note repeating an "equal-weight" rating.
JP Morgan's banking team repeated "underweight" advice. "In sum, this is clearly not good news, and a sign of what we could expect from the other UK banks as we go into earnings season. It also highlights the vulnerability to further write-downs at banks like Bradford & Bingley who have as yet taken no SIV impairments," they said.
The US broker told clients that the combined impact of losses to the P&L and Treasury reserves is a reduction in book value of about 40p per share compared against its previous book value of 413p.
Analyst Ashley P Stuart continued: "Interestingly, at 2007 year-end funding from customer deposits continues to deteriorate with 56% of customer loans covered by deposits compared to 59.5% at the end of the first half - this is one of the weaknesses we believe that a smaller franchise like A&L will continue to have as deposits will tend to go to the larger players."
A&L's Chief Executive David Bennett has taken temporary leave due to an illness.
Shares in A&L were down 0.5p at 724.5p in early trading. The stock has risen 12% this year, the best performance by any UK bank, on renewed speculation that it could be a takeover target for Santander.
"We believe (Santander) the only potential buyer and does not need to pay up for what we think is an unsustainable business model," JP Morgan concluded.
