Alliance & Leicester shares tumble

In the wake of Northern Rock’s problems, shares in other banks have been caught in the avalanche too. Alliance & Leicester shares have tumbled, with one third of its value wiped out as rumours grew that it was about to follow Northern Rock.

Alliance & Leicester is the UK’s seventh largest bank; Northern Rock is the fifth largest UK mortgage lender. Rumours had it that the Alliance was exposed to the same kind of problems that saw Northern Rock going to the Bank of England for emergency funding last week.

Alliance & Leicester has a share of the UK mortgage market at around 4%, and, like Northern Rock, relies strongly on the money markets to fund the home loans, but not as much as Northern. Alliance changed from a building society to a bank in 1997, and has been trading at a share premium for a while as it has been seen as a takeover target. Now, however, its share price has fallen dramatically.

Alliance & Leicester has not been the only bank to suffer following Northern Rock’s own crisis. Bradford & Bingley’s share price fell by 15% and HBOS saw its shares lose 5%. Barclays saw a more modest fall of 2.5%.

A spokeswoman for Alliance & Leicester said: “What has happened with our share price today has been driven by what is going on in the retail banking sector, where HBoS, Barclays and Bradford & Bingley have also been hit. The fall in share price has nothing to do with our profitability - it is just a knock on effect of what is happening with Northern Rock.”

On Monday of this week broker Merrill Lynch downgraded its recommendation on Alliance & Leicester from ‘neutral’ to ’sell’, as it believed a takeover is now unlikely, especially with cheaper UK assets available for an interested buyer.