Alliance & Leicester yesterday sparked bid speculation as it issued a warning on its revenues for this year and said it would turn away from the mortgage market, sending its shares to a record low.

The bank also said that it would not compete aggressively for savings business. Coming on top of a 30 per cent fall in pretax profit for 2007 and confirmation of an £185 million credit market writedown, the revelations reignited speculation that Britain’s seventh-largest bank would be a takeover target.

Shares in A&L hit a record low of 482p in morning trading before closing down 36p, or 10 per cent, at 492p. Analysts described the bank’s outlook as “miserable” and said that it was in a “worst of all worlds” situation.

Chris Rhodes, the finance director, who is standing in for the chief executive, David Bennett, said the bank would spend an extra £150 million on wholesale borrowing this year and would see its margins cut as a result.

Analysts said that the bank’s reliance on wholesale funding – deposits fund only 56 per cent of its lending – meant that its cost of borrowing was likely to be higher than rivals because it was seen as riskier. It was Northern Rock’s heavy dependence on inter-bank loans that took it near collapse.

One analyst said: “If there was a pecking order of who’d get in trouble with the credit crunch, Rock was blazing a lead, but A&L was second, albeit a long way behind.”

However, Mr Rhodes said that the bank had secure funding into the first quarter of 2009. “That’s come at a cost, but we feel it’s the right thing to do to pay the price for security,” he said.

A&L has 4.4 per cent of the UK mortgage market, but Mr Rhodes said that he expected to reduce mortgage lending this year. The bank has limited its mortgages to 90 per cent of a property’s value and its arrears improved last year to 0.49 per cent of its book, down from 0.51 per cent in 2006.

Mr Rhodes also said that he was not prepared to fight for business in the cutthroat savings market by offering very high interest rates. “There are some best-buy instant access accounts offering 6.9 per cent, but we’re not willing to pay over the odds,” he said.

A&L hopes to win new current account customers by scrapping overdraft interest and revamping branches. The bank has a 2.8 per cent share of the current account market but was responsible for 4.3 per cent of new account openings last year.

The bank’s pretax profit dropped to £399 million, from £569 million, for the 12 months to December 31. The final dividend rises from 54.1p a share to 55.3p. A&L said that this year’s shareholder payout was likely to stay at the 2007 level.

Most analysts were damning about the results. Alex Potter, of Collins Stewart, said that A&L’s revenue could fall by as much as 10 per cent this year, while Dresdner Kleinwort said that A&L could struggle to win accounts.

Keefe, Bruyette & Woods said: “The outlook reads poorly, with volumes down, costs rising, margin guidance slashed, the earnings target cut and the dividend guided flat in 2008. Add in a weak capital position and risk of impairments rising from a low level, and the outlook is miserable, with significant earnings cuts likely. The only positive may be a white knight if the stock falls enough.”

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