Mortgage lender Abbey National has delivered a shock profit warning, blaming bad loans at its commercial banking division for a "substantial" drop in earnings.
Shares in Britain's sixth-biggest bank tumbled more than 10 per cent to £8.99, their lowest level since September, as investors punished the group that assured the market only two months ago that it was trading in line with expectations.
The news sent jitters throughout the banking sector, previously seen as a safe haven in tough times for stock markets, with HBOS trading down nearly four per cent and Royal Bank of Scotland down nearly two percent.
Abbey said it would rein in dividend growth this year and chief executive Mr Ian Harley said it would aim to cut costs and could consider selling non-core assets.
It reported that sales of its with-profit-bonds, a type of long-term savings product, were below expectations partly because of shaken investor confidence in falling equity markets.
The group's earnings suffered last year from losses on junk bonds and the collapse of US energy firm Enron, with annual pre-tax profits for 2001 falling two per cent to £1.9 billion.
Abbey said in a statement that it expected that bad debt provisions would return to "more normal levels" in 2003, but other analysts remained wary of the group's performance.