Lender moves into PFI funding

Alliance & Leicester is planning to back the private finance initiative by lending money to hospital and school building projects.

The former building society revealed its plans to expand into PFI as it reported a 16% rise in pre-tax profit to £608m in 2004. The pre-tax figure includes a £52m gain on the sale of one of its businesses. Operating profit rose 6% to £556m.

The bank admitted its new mortgage product, Help With Fees, had not sold as well as hoped and that in the fourth quarter net lending was nil. This means it lost as much existing business as it won.

Richard Pym, A&L's chief executive, said other lenders had offered "eye-popping" inducement fees in the fourth quarter and that A&L had decided not to match these.

The group, which shuns rapidly growing buy-to-let and high loan-to-value products, took a 2.4% share of the mortgage market in 2004. This is lower than its historic 3.2% share but up from 2% in 2003.

Mr Pym said A&L would push into PFI in 2005 and might also offer higher loan-to-value mortgages once house prices had slowed. Richard Banks, the managing director of wholesale banking, said the move into PFI would be cautious and would focus on education and the health service. PFI has been regarded as risky of late, particularly since contractors like Jarvis have been pushed close to collapse through their involvement in such projects.

Mr Banks, whose business already provides services for local authorities, said A&L would be careful to ensure that, as a new PFI operator, it would not pick up the "rubbish" and "crap" left by rivals.

The bank intends to buy back shares in 2005, but less than the £153m in 2004. It achieved a return on equity of 23.3% in 2004 and is targeting a return of 20% in each of the next three years. Analysts at Keefe, Bruyette & Woods, said: "Without buy-backs and consolidation, the underlying story would be pedestrian". Its shares rose 1.5p to 892p, up 0.17%. A&L will pay a 48.3p dividend, up 10%.