July 5 (Bloomberg) -- Alliance & Leicester Plc shares posted their biggest drop in almost five years after Credit Agricole SA, France's biggest bank by assets, decided against bidding for the U.K. lender.

The stock fell 65 pence, or 5.7 percent, to 1,084 pence in London, its sharpest decline since Sept. 20, 2001. The bank, based in Leicester, England, was valued at 4.9 billion pounds ($9 billion), after the market closed today.

``Credit Agricole has done a favor for its own shareholders'' because Alliance & Leicester's stock price was ``inflated,'' said David Dodds, an analyst at SVM Asset Management in Edinburgh, which oversees about 650 million pounds and doesn't hold the U.K. bank's shares. ``Alliance & Leicester is the slow man on the block.''

Alliance & Leicester was this year's best-performing U.K. bank stock until today, when it fell to fourth place. Credit Agricole said it abandoned a potential bid after the Paris-based bank evaluated the returns it could generate from buying Alliance & Leicester, which has been struggling to reverse declining earnings.

``It's good news for Agricole as this deal had no rationale,'' said Alain Tchibozo, an analyst at ING Groep NV in Paris, who has a ``buy'' rating on shares of the French bank. ``What will they be doing now? They're clearly looking for something else in Europe.''

Greek Move

Credit Agricole said in May it was assessing Alliance & Leicester, which would have given it 5.5 million U.K. customers. Alliance & Leicester has 254 branches in Britain, a 3.4 percent share of U.K. mortgage lending and assets of 58.98 billion pounds.

Georges Pauget, chief executive officer of Credit Agricole, has said the bank has more than 5 billion euros ($6.3 billion) to spend outside France and is seeking a large purchase in western Europe. Credit Agricole reiterated in its statement today that it had been looking at the U.K. bank ``amongst'' other companies for a possible deal.

It will probably now seek to expand in Italy, ING's Tchibozo said. ``They are looking at Italy, Italy, Italy, which would be great,'' he said.

Rene Carron, chairman of Credit Agricole, declined to comment on the French bank's future plans for Italy in an interview during a conference in Paris yesterday.

The French lender, which already owns 8.9 percent of Emporiki Bank of Greece SA, made a cash offer in June that values the entire Athens-based bank at 3.1 billion euros.

Shares of Credit Agricole fell 1.6 percent to close at 29.82 euros in Paris. Alain Berry, a bank spokesman, declined to give more details on the reasons behind Credit Agricole's decision.

French Expansion

French banks are seeking to expand abroad as increasing competition squeezes lending margins at home. In Greece, lending expanded 21 percent last year, more than double the average rate in the 12 nations that share the euro, according to Credit Agricole. Greek mortgage loans rose by a third last year, compared with 11 percent in countries sharing the euro.

Before Credit Agricole's decision today, Alliance & Leicester shares had advanced 16 percent this year, making them the best- performer on the nine-member FTSE 350 Banks Index.

``While there are other potential bidders for A&L over the long term, the current bid premium will evaporate,'' James Hutson, an analyst at Keefe, Bruyette & Woods Ltd. in London, said in an e- mailed statement. Hutson cut his rating on the stock to ``underperform'' from ``market perform.''

Santander Central Hispano, SA, Spain's largest bank, is now the most likely bidder for Alliance & Leicester, according to Dodds of SVM. The Spanish bank would be able to cut costs by merging Alliance & Leicester with Abbey National Plc, the U.K. mortgage lender that Santander bought in 2004.

Earnings Decline

Richard Pym, CEO of Alliance & Leicester, said Credit Agricole's decision hasn't ``diverted'' the British bank from its strategy. ``We welcome the clarification,'' he said.

``In the absence of bid speculation in the short term I can see the shares drifting down another pound or so,'' said James Hamilton, analyst at WestLB Equity Markets, who has a ``sell'' rating on the shares. ``The fundamentals remain weak. It has been generating very little in the way of income growth.''

Alliance & Leicester's net income fell 8 percent to 389.4 million pounds last year as profit margins narrowed and bad debts rose. Pym has tried to control costs while encouraging customers to use Internet and telephone services rather than bank branches.

To contact the reporter on this story: Jon Menon in London jmenon1@bloomberg.net Albertina Torsoli in Paris at atorsoli@bloomberg.net

Last Updated: July 5, 2006 12:10 EDT