Monday, 2 June 2008

The price of failure

One of the UK's largest buy-to-let bank is in deep trouble. The Bradford and Bingley has just issued a surprise profits warning. Understandably, investors were not happy. The share prices is down around 25 percent so far today. Since the beginning of the year, it has fallen 76 percent.

The reason for the loss of investor confidence is easily understood - it is their balance sheet that causes so much concern.

The bank is deeply implicated in the buy-to-let bubble. With arrears rising, and collateral values collapsing, the bank must be causing sleepless nights over at the FSA. A staggering 58 percent of its mortgage lending went to the buy-to-let brigade. A further 22 percent of lending went on self-certified loans.

The arrears picture is also awful. The lender revealed that its annualised bad debt impairment charge has more than quadrupled from £23m to £108m after just four months of the year. Moreover, everyone knows this number can only get worse as the buy-to-let market collapses further.

The bank also had to take another £89 million of writedowns on its credit market assets. So far, the B$B has written off around £300 million. Despite these catastrophic losses, the bank still has a £944 million exposure to so-called "toxic assets.

The problems at the Bradford and Bingley are just the end result of years of reckless lending. If banks fuel a housing bubble, should anyone be surprised that it runs into difficulties when the bubble collapses?

15 comments:

aSteve said...

B&B are a very interesting case.

I'd be very interested to establish the distribution of LTV of mortgagors within each of the three groups.

What has been most interesting today has been the sympathetic slide in the value of HBOS shares.

Vodka drinker said...

I wonder if the Treasury has a contingency plan for the B&B

CWS said...

HBOS, the A&L, the B&B and paragon - the four horsemen of the UK crisis apolcalyse.

Housingblogwatch said...

Are we looking at a re-run of NRK?

VADO said...

Hasn't B&B's rights issue more or less failed?

Anonymous said...

Very succinct presentation of the facts Alice. Much better than what the MSM is producing.

I'm picking B&B to be in a Countrywide-like state of zombification for the rest of the year, with either bankruptcy or forced merger following soon.

If I had a savings account there, I'd be standing at the Withdrawal window right now.

Just goes to show that anyone who lets the bank lock up their money for 12 months in the current climate is a fool. I personally took lower rates on all my deposits to maintain instant access.

Nick

Russell said...

According to management they are funded until mid 2009. Which would imply that they would not do an NRK until at least then.

However they do have a history of telling porkies like "we're not planning a rights issue" (mar or apr 08) or "no profit warning on the cards" (may 08). So I'm not sure just how re-assured I would be....

Anonymous said...

How they've managed to avoid a run is beyond me, I put it down to apathy of the general public. Couldn't believe the Beeb this morning at around 6am when they cut to the economics correspondent - Declan Curry I believe - his first story was an article about the positive effects biscuits in the boardroom. Unbelievable. I hope the guys and B&B have got a bit tin, they're going to need all the poisitivity they can get.


Chefdave.

Anonymous said...

Like Asteve I would like to establish the LTV ratio's, particularly in their BTL sector as this could be a crucial factor in determining (in)solvency. If a run was going happen then I think that it would have been today, perhaps a slow grind down to bankruptcy/takeover is more likely as prices continue to fall.

Chefdave

Wrtetched Finance said...

B&B would not be keen to publish their LTVs right now. It could spark a run.

Ed said...

The future of the B and B is now entwined with the buy to let market. If it crashes then the B and B will go bust because the default rate will be huge! If it levels out then B and B shares would be a great investment at current prices.

traderboy said...

B&B could be interesting to get long for a trade and hope it bounces following recent large falls. but i would not describe it as a good investment.

it is clear that a significant number of they people they lent to require low rates to stay current on their debt...but with the BoE on hold for the foreseeable due to inflation, and banks trying to price mortgages such that people WON'T take them out or refi with them, mortgage rates are going to stay high and probably rise further from here. So the BTL'ers on interest-only deals that will be resetting from 4-5% to ~7% will be in a world of pain. Default rates will go up, B&B's arrears will rise. They will burn through this extra £400mm capital quicker than anyone out there is pricing in.

Oh and just for an extra kick in the teeth, S&P lowered their short-term rating on B&B to A2 from A1 late this afternoon which will make it SUBSTANTIALLY more difficult for them to fund in the Commercial Paper market.

Bye bye B&B. If you have more than £35k in it I suggest you get down there sharpish tomorrow morning...

Anonymous said...

Good comments Traderboy

Nick

simon said...

Were the good folk at B&B intent on destroying the bank?

(maybe the've never forgiven the carpet baggers?)

I can only assume they could see this coming but have all pocketed loads of money in bonuses on crazy loans.

All this (global) banking madness seems to come down to a bonus system where profligate lending has been heartily rewarded.

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