Credit Crunch Claims Another Victim

The last day of 2007 saw another victim of the credit crunch come forward, but it’s unlikely to be the last victim.

Personal loans group London Scottish Bank gave a warning that it will almost certainly make a loss for the year, and that it needs to raise money, and may not be able to pay its final dividend. As a result of the news the shares fell by over 20%, by 16p to 61p.

Chief executive Robin Aston, only in the job for a month since joining from Provident Financial, was at pains to stress that this was not about to become another Northern Rock. He said: “Three of our four business are trading well. Our balance sheet is strong and we have access to funding and no liquidity problems.”

LSB’s problems stem from its loan division. The division’s financial year ended in October, and the group has decided to increase its bad loan write-offs by £22m, taking them to £50m. However, in doing that, the pre-tax profits for the group are wiped out. Analysts had forecast that these would be £17m, but will now turn into a loss of £5m. In 2006 the pre-tax profits were £17.2m.

The write-off means that LSB will not have enough regulatory capital to meet the new Basel II requirements, which came into force at the turn of the year. The Financial Services Authority has warned LSB of this problem. LSB will be around £13m below the required level, but is to discuss with the FSA how it can achieve the requirements. It is possible that the LSB will raise money through a rights issue of sell off some of the more profitable parts of the business, with Ashton saying hat nothing was ruled in and nothing was ruled out. Until it raises the money, the FSA is likely to tell LSB that it must restrict its lending activities.