More than half a million shareholders in Alliance & Leicester (A&L) are facing a dividend cut of 30 per cent this year, analysts predicted after the bank unveiled £391 million of treasury writedowns.

A&L, in a statement before its annual meeting, said that core operating profit in the first four months of the year had been similar to last year and there had been no deterioration in the quality of its loans.

Share dealers, unnerved by the writedowns, which were worse than had been expected, hammered the shares, which ended the day 10 per cent down at 458¾p, near to their lowest point and well below the 533p at which they were floated 11 years ago.

In February A&L said that it would try to maintain the dividend this year at the 55.3p level paid last year, although any decision would not be taken until the half-year. A spokesman said yesterday that remained the intention.

However, James Hutson, banks analyst for Keefe Bruyette & Woods, predicted the payout would be cut by 30 per cent to help to preserve A&L’s capital position. After yesterday’s fall the shares are yielding 12 per cent, suggesting that many in the stock market expect a sharp cut in the payout.

More than 540,000 people own shares in A&L after the former building society demutualised in 1997. It has raised the dividend every year, until now.

The write-offs included £192 million of impairment losses and other mark-to-market losses on treasury assets — mostly investments in structured investment vehicles (SIVs), holding supposedly safe mortgage-backed securities. A&L said that it had compounded its problems by insuring holders of one package of SIV assets late last year against default. The loss on that bet was £41.3 million.

A&L also reported £199 million of writedowns on treasury assets that are trading at a discount, but which it expects eventually to come good and therefore will not lead to real losses.

Credit quality on its core home loan portfolio was good, it said. Only 2,650 out of 462,270 mortgage borrowers were more than three months in arrears with their payments, less than half the industry average.

Yet analysts were also disappointed at the fast pace at which A&L is shrinking its core business and expects it to continue contracting. Total mortgage balances fell by £1.5 billion to £41.2 billion in the first four months of the year. A&L lifted its mortgage rates last week, clear evidence that, like most lenders, it is not interested in winning business except on highly advantageous terms.

The bank declined to rule out a rights issue to beef up its balance sheet. Although strongly reliant on the paralysed wholesale markets for much of its funding, it said, nevertheless, that it had funding in place to last until the second quarter of 2009. Core tier 1 capital stands at 6.4 per cent, which A&L described as strong.

David Bennett, the chief executive, said that A&L had made good progress. The bank has appointed headhunters to find a chairman to replace Sir Derek Higgs, who died last month. Roy Brown, deputy chairman and senior independent director, is standing in temporarily.

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