Britain's second-largest sub-prime lender yesterday revealed a catalogue of problems that led to a larger than expected £15 million loss last year and caused the company to breach the City watchdog's capital requirements.

London Scottish Bank's new management unveiled the overdue 2007 figures and announced plans to sell its invoicing business and focus on debt collection. The bank, which specialises in loans to people with poor credit histories, said that it had agreed a new business plan with the Financial Services Authority (FSA) to make up the £12.7 million shortfall in its regulatory capital. The new plan will involve big cuts to the bank's mortgage and unsecured loans divisions.

London Scottish warned that unsecured lending had continued to sustain losses in the first quarter of this financial year. Costs were also higher in the first quarter and profits at Robinson Way, the debt collection business, took a £1 million writedown after a “poorer than expected” collection performance.

The bank scrapped its final dividend, while that for the 12 months to October 31 2007, fell 66 per cent to 2.05p per share. Shareholder payments will be withheld until the bank has replaced its regulatory capital and reorganised the unsecured credit division. Shares in the bank rose 5 per cent to 26p.

London Scottish said that 2008 would be a “year of change” with “subdued financial performance”. The bank promised further guidance on its new business plan at its general meeting in April. The company said: “Beyond 2008, the directors believe that the group has an excellent future ... This is a good business with competitive advantage in a growth market.”

Analysts said, however, that the bank could be forced to offload assets at less than par value, and did not rule out a rights issue if the bank cannot replenish its regulatory capital. Credit Suisse said: “While we do see value in Robinson Way, our near-term concerns remain. For now, we would remain cautious on the shares and would not be tempted to be buyers at this stage.”

London Scottish admitted in December that it had a £13 million shortfall in the cash cushion required by the FSA after higher than expected impairments on its loans to people with patchy credit histories. At the time, the bank assured investors that it was “not another Northern Rock situation” and that liquidity was not a problem.

Rothschild has been appointed to sell the bank's invoicing business, which pays companies for their outstanding invoices, then collects the cash. The investment bank will also look at selling other lending assets. Analysts said that Cattles, a rival sub-prime lender, and Promethean, the private equity company backed by Sir Peter Burt, former ITV chairman, had both been interested in London Scottish in the past and could buy parts of the bank.

The bank said that it had committed funding facilities worth £140.5 million but that £81.5million of these come due before October. London Scottish is thought to be in discussion with its wholesale lenders, including Royal Bank of Scotland and HSBC, about refinancing this credit.

Payments to advisers who are working on the restructuring of the bank are expected to come to £4 million by the end of the year.

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