Shares in Cattles, the doorstep lender whose sub-prime clients have been falling behind on their payments, hit a 23-year low yesterday after Merrill Lynch cut its price target on the group by more than 60 per cent.

The shares fell by 1/4p, or 2.3 per cent, to 10p yesterday, their lowest since October 1985, amid anxiety about its banking licence application, which is key to its future. Merrill cut its target price on the shares from 135p to 50p, well above yesterday's closing price but significantly below the broker's previous estimate.

David Postings, the chief executive, hopes to secure about £1billion in retail deposits by 2010 to help to reduce its reliance on the wholesale markets for funding.

The group is in desperate need of additional funding after huge defaults on its mortgage portfolio have left it close to breaching banking convenants. A breach of its convenants would force the group to cease making new loans and to start running off old ones to pay back the debt.

Cattles applied to the Financial Services Authority (FSA) for a banking licence in August, but the City watchdog has since decided to toughen up its qualifying criteria. As a result, the application process has been lengthened, delaying the expected deadline for the FSA to make its decision from January to March.

In addition to cutting its price target for Cattles, Merrill Lynch followed Citigroup in warning that, without the licence, there would be a significant risk of Cattles breaching its banking covenants.

Yesterday's shares decline followed a drop on Monday of almost a third, or 5p, to 10p. That fall was prompted by the Citigroup note, which said that it would take only a 1 per cent rise in its cost of funding or the bad debt charge to breach covenants.

Cattles is also in talks with banks, led by Royal Bank of Scotland, about renewing the terms of its increasingly expensive £500 million credit facility, which is due for renewal in July.

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