Banking group Alliance & Leicester has worried the City after warning that earnings forecasts may have to be downgraded as it prepares to lend money to fewer people.

Shares in the UK mortgage lender fell 13.5% to 456.5p in early trading on Wednesday as it unveiled a 29% drop in full-year operating profit. This figure wasn't a surprise, given that the bank had already unveiled £185 million worth of write-down on its debt-backed securities in January.

More of a concern was confirmation that its lending policy would be tightened. Alliance & Leicester wants to focus on balance sheet quality which means it is going to have to get tough on who it lends money to. While this is a sensible business strategy, it does mean that earnings could keep falling for several years.

Alliance & Leicester has estimated its 2008 net interest income will be around £150 million lower than if market conditions were similar to those in the first half of 2007.

The company has maintained its final dividend of 36.5p, making a total of 55.3p, up from 54.1p a year ago. This level is expected to be the same for 2008, added the bank.

'The trading outlook for financial services will be challenging in 2008, and we will maintain the prudent approach to lending which has led to our customer lending asset quality being better than industry averages,' said finance director Chris Rhodes.

The bank insists it is not dependent on a single market, saying just over a quarter of group revenues come from mortgages and savings.

It will launch a push on personal and business current accounts and to increase customer savings deposits.

Stockbroker Numis declared Alliance & Leicester's 2007 performance to have been 'another bad set of results – (with) more to come'.

The bank's £399 million pre-tax profit was below Numis's forecast of £412 million. The stockbroker believes the bank has a 'structurally weak' market position and may continue to struggle this year. However, it said there are benefits to the bank's relatively low-risk lending book.