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Alliance & Leicester (AL.)

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Tuesday 04 September, 2007

Alliance & Leicester

A&L Treasury Investments

Alliance & Leicester PLC
04 September 2007



                  Alliance & Leicester's Treasury Investments



Background

Alliance & Leicester management will shortly be holding its usual post-interims
equity investor meetings in London and speaking at investor conferences. Ahead
of these events, and in the light of the current interest caused by exceptional
liquidity conditions in the market for certain financial assets, we are
providing an update on the entirety of Alliance & Leicester's Treasury
investments.



Treasury Investments

Treasury invests in high quality and well-diversified assets using a number of
investment vehicles. The statutory balance sheet in our interim results
announcement reported Treasury assets of £18.9bn out of total Group assets of
£71.2bn (see Note 1). At 28th August, 26% of Treasury trading and investment
securities were rated AAA, 35% AA, 36% A and 3% BBB. Over 96% of total Treasury
assets are deposits, floating rate notes (FRNs) issued by banks and building
societies, consumer asset backed securities (ABSs), or derivatives used in
support of our normal business operations, with the remainder a combination of
collateralised debt obligations (CDOs), collateralised loan obligations (CLOs),
structured investment vehicles (SIVs) and principal protected notes (PPNs). We
have no direct exposure to US sub-prime lending.



The majority of our consumer ABSs are European mortgage backed securities; 97%
are rated AAA, all are of investment grade with £7m rated below A. None of the
assets is on credit watch by the rating agencies, and we do not have any
exposure to US sub-prime assets in this portfolio.



Our CDO investments are well-diversified and held both on balance sheet and off
balance sheet through our conduit facility. These CDOs are all of investment
grade and are almost entirely AAA rated tranches, with only £6m rated below A.
Our aggregate on and off balance sheet exposure to CDOs containing US sub-prime
mortgage assets is £175m, with 99% rated AAA including 40% rated super senior
AAA; £55m of these CDOs are on balance sheet. None of our CDOs has been
downgraded or had their outlook changed by any credit rating agency.



We invest in a number of SIVs in the form of mezzanine and capital notes. These
are well spread, with none accounting for more than 15% of the total investment
of around £390m; over 90% of our positions are in SIVs established before 2006
and we have no investments in 'SIV-lites' (Note 2).  Over 99% of the underlying
assets in the SIVs are rated A or better, with 64% rated AAA and 24% rated AA.
We have investments in PPNs totalling around £70m, which all have the loan
principal protected by the issuing bank. The SIVs and PPNs are invested in a
diversified range of underlying assets, with no significant exposure to US
sub-prime assets.



Our off-balance sheet conduit facility currently totals around £770m. This is
invested in a diversified range of underlying assets, including CDOs and CLOs,
all of which are AAA rated. CDOs in the conduit including any US sub-prime
exposure amount to £120m, which forms part of the £175m total quoted above. None
of the assets in the conduit is on watch for downgrade by any credit rating
agency.



The accounting treatments used for our Treasury investment assets are set out in
Note 3.



Summary

Current conditions in the funding and liquidity markets have had no material
impact on either profits or franchise growth. We have not been materially
impacted by recent changes in LIBOR, with our variable-rate retail funding base
continuing to be greater than our variable rate mortgage book.



In our interim results announcement on 27 July 2007 we set out a detailed
outlook statement for the second half of 2007, and we plan to update the market
as usual later in the year via our pre-close trading statement, with our share
buyback programme continuing in the meantime.



Contacts



Equity investors
Mark Jones            Head of Investor Relations            0116 200 4492

Debt investors
Ian Hares             Group Treasurer                       0116 272 6912

Media                                                       
Stuart Dawkins        Director of Corporate Communications  0116 200 3088




Disclaimer



This report contains certain forward looking statements with respect to the
financial condition, results of operations, and businesses of the Alliance &
Leicester Group. These statements and forecasts involve risk and uncertainty
because they relate to events and depend upon circumstances that will occur in
the future.  There are a number of factors which could cause actual results or
developments to differ materially from those expressed or implied by these
forward looking statements and forecasts. The statements have been made with
reference to forecast price changes, economic conditions, the current regulatory
environment and the current interpretations of IFRS applicable to past, current
and future periods. Nothing in this announcement should be construed as a profit
forecast.







Notes



1. The following is an extract from the statutory consolidated balance
   sheet published in our 2007 interim results announcement:


Assets                                                                           As at 30.06.07
                                                                                             £m

Cash and balances with central banks                                                    1,589.1
Due from other banks                                                                    1,680.4

Trading securities                                                                      1,627.2

Investment securities:
-          available-for-sale                                                          11,521.3
-          held-to-maturity                                                               400.2
-          loans and receivables                                                          150.3
-          at fair value through profit or loss                                         1,057.2
Cash, treasury assets and due from banks                                               18,025.7
Derivative financial instruments                                                          837.3

Total Treasury assets                                                                  18,863.0



Treasury also has £156m of undrawn committed facilities to financial
institutions.


     
2.   We had an investment of £2.5m in one 'SIV-lite' which has subsequently
     been restructured.



3.   Our holdings of bank FRNs and consumer ABSs are split between 'trading
     securities' which are fair valued with changes going through the profit and 
     loss account, and 'available for sale' which are fair valued with changes 
     going through reserves. The majority of our CDOs are accounted for as 
     'available for sale' and are fair valued with changes going through 
     reserves, although a small proportion are fair valued through the profit 
     and loss account. Our SIV investments are treated as 'held-to-maturity' 
     investments and are not fair valued but are subject to a test for 
     impairment. The accounting treatment of our PPN investments is a mixture 
     of fair value through the profit and loss and 'available for sale'.






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