High street bank Alliance & Leicester has seen profits annihilated by the ongoing turmoil in the financial sectors.

The lender – which has been linked to a takeover bid from the Spanish owner of Abbey, Santander – saw statutory profit before tax fall to just £2 million for the first six months of 2008.

This compares to a figure of £290 million recorded for the same period of 2007 – a 99 per cent reduction, in line with predictions earlier in the week.

The news follows a bad week for the financial industry, with Lloyds TSB announcing profits had fallen 70 per cent, while HBOS reported a 51 per cent cut following a £1 billion writedown on investments.

Largely responsible for the fall in profits at Alliance & Leicester has been a £209 million fall in the value of risky assets held by the bank – the UK’s seventh biggest in terms of marker capitalisation – and higher funding costs.

Alliance & Leicester explained the value of certain treasury investments fell by £66 million and the impairment of other assets cost £143 million.

The business also took a £70 million hit from higher funding costs.

Despite the losses Alliance & Leicester maintains: ” We continue to be well capitalised and to have a strong funding position.”

Some 154,000 new personal current accounts and 17,200 new business banking current accounts have been opened over the last six months, as the bank continues to focus on current accounts and retail customer deposits.

Retail customer deposit balances at the bank were up £0.8bn, to £24.1bn, at the end of June 2008.

“Alliance & Leicester’s underlying business is in good shape, with strong customer lending asset quality and arrears rates running far better than market averages,” said David Bennett, group chief executive at Alliance & Leicester.

“We are well-capitalised and have a strong funding position.

“The performance of our customer-facing businesses remains robust, but our financial results have been significantly affected by treasury losses in the first four months of the year and by high funding costs.”

Alliance & Leicester will pay an Interim cash dividend of 18.0p per share.

“Alliance & Leicester’s strategy and the prudent approach we have taken in response to recent financial market conditions, have enabled the group to be resilient in the current very difficult trading environment,” added Mr Bennett.

“The board is, however, acutely aware of the significant external risks presented by deteriorating economic conditions and continuing turbulence in financial markets.

“Against this background, the proposal from Santander provides greater stability and greater certainty in uncertain times.”

In early trading shares in the bank fell two per cent to 338.50 pence. This, however, is down from a year high of 1,040 pence per share.